James has seen a lot of transactions and has had a lot of his own real estate investing experience. We’ll hear about some of his own deals, adding bedrooms, and how he looks at deals not only for himself, but also for his clients. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“Don’t let the contractor dictate the budget” – James Dainard

James Dainard Real Estate Background:

Co-founder of Heaton Dainard, a full service real estate brokerage specializing in building long-term wealth and financial stability for clients

Honored as Co-Founder of one of Washington’s Fastest Growing Private Companies in 2013, 2014, 2015, and 2016, and Inc. 5000’s fastest growing companies in America

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, James Dainard. How are you doing, James?

James Dainard: I’m doing well, man. Thanks for having me on. I’m excited to talk to the best listeners ever.

Joe Fairless: That’s right. Well, I’m looking forward to our conversation. A little bit about James – he is the co-founder of Heaton Dainard, a full-service real estate brokerage specializing in long-term wealth and financial stability for clients. He was honored as co-founder of one of Washington’s fastest-growing private companies in 2013, 2014, 2015, 2016, and Inc. 5000’s Fastest Companies in America. Based in Bellevue, Washington, a place I spent a decent amount of time in six years ago. I would always go to [unintelligible [00:01:41].07] offices in Bellevue… So with that being said, James, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

James Dainard: Yeah. My background is I actually started in real estate when I was a senior college, 22 years old; I was waiting tables and I started working for an investment company in the wholesale market… Going out and knocking on doors, getting them contracts and selling them off. What my main focus is is really working with investors on identifying how to maximize the returns in their current portfolio, or finding them new portfolios to acquire, whether it’s 1031 exchanges to increase their annual cashflow, or to just increase their portfolio with liquidity, cashflow rentals… And then we do a lot of fix and flip properties and training with investors, kind of teaching them the guts of it about construction management specs, and then getting them sold.

Joe Fairless: Wow, okay. So let’s talk about maximizing returns on a portfolio… What are some mistakes you see investors or people make?

James Dainard: Some mistakes, and mistakes that I’ve done myself, is sometimes creating an asset – if I have a current performing asset, and it maybe gets me a 7% or 8% return, and I go to buy something new, or trade in with something new that might give you a 10% return.

One thing I learned over the last couple of years – and we’ve kind of adjusted our strategy based on this – is once you buy that next building, you might get a nice equity position, you’re increasing your cashflow, but you’ve gotta pay attention to the dead time on your money. How long are you out that income when you make that trade to get the repairs and renovation done?

So what we kind of do now is we factor in our dead time of loss of income for that 10-12 months that these projects can take. So that’s one thing investors should always pay attention to – it’s not just the cashflow, but what’s your overall return over a 10-year basis.

Joe Fairless: And what are some tips you have for people listening in order to calculate that accurately?

James Dainard: Build yourself a good spreadsheet. We have a good rental spreadsheet… So when we do a trade, we don’t just break down the cashflow, but then we break down the cashflow and loss of income during the renovation period… So for us, we actually have everything set up on a two-tier refinance calculator. One when we enter the new asset with hard money, and then holding times during that time, calculating your annual taxes, utilities – all costs that you might overlook at first…

And then it then turns it into a refinance, where we go into the BRRRR type strategy, where we’re refinancing out all of our cash, or a majority of our cash, or how much cash we were weaving in… But based on that first set of free finance calculations, we can really see what our loss of income is during that time. I’m more than happy to always provide that spreadsheet to people, but it’s about really just paying attention and then building your financial tools around your business model.

Joe Fairless: And just to give us an example of a couple transactions you’ve recently done… What are some examples?

James Dainard: An example… Recently when I did a trade – I actually sold four rental properties, and then I 1031-exchanged them into a triplex/pseudo-rooming house… So two units will be conforming units, and then the third unit is gonna be an 8-bedroom rooming house. It’s right next to the University of Washington, so it has high rent potential… So like I was just talking about, one thing I had to get comfortable with and make sure the trade was worth it is I took three properties that were making about 7%-8%, and then I have about 12-months’ worth of renovation, of dead time… So I’m losing about 60k in income on all three properties… But I went from making a 7%-8% return to now after the property is completely stabilized I’m going into a 14% cash return, with a really good equity position, in a really good neighborhood (I’m also trading into a better neighborhood). So for me the dead time and the money was worth the trade.

Now, if it would have been a 10% return trade, I probably would have passed on it at the end of the day. So I had to really adjust my numbers for this scope of work that I was doing.

Joe Fairless: You probably would have passed a 10% even though it’s in a better area, and that dead time is a one-off variable, not a constant variable?

James Dainard: Yeah, because for me, if I’m gonna make the trade, I wanna make sure it’s a next-five-year trade. So anytime I’m looking at maybe some awesome assets – and I liked my three rental properties that I had; they weren’t under-performers by any means, and they were in good locations, but for me if I’m gonna go through selling off all my assets, putting it in and having that dead time, I wanna make sure it’s worth it. So for me, I always factor about a 4% increase on my trade.

Now, if it would have been a lot easier building, which I could have renovated in a three-month period, I would have gone for a maybe 10%-11% trade. But the scope of work dictated the return I was trying to trade.

Joe Fairless: Talk us through the renovation project, please.

James Dainard: The renovation – one unit is very straightforward, I’m doing electric plumbing. It’s a one-bedroom/one-bath unit. I can’t do a whole lot more with that, so I’m just hitting all the systems, getting them safe, getting it updated to maximize rents. The current rents on the property were $1,395, and I can get them up to $1,995 with about a $20,000 renovation.

The second unit is a two-bedroom/one-bath that the guy had partially demo-ed already… It’s about 900 sqft, and I’ve kind of laid out how I can get a three-bedroom/one-bath unit, which takes a lot more framing and design layout. I basically have to gut the whole thing upstairs… But it takes my rent potential from being about $2,200 to $3,400. So for me doing the [unintelligible [00:07:00].26] that third bedroom brought a substantial more income to me on that unit.

And then the third unit is actually a two-bedroom/one-bath, that brings in about $2,100/month, and I’m actually converting that out into an eight-bedroom rooming house… Because it’s a triplex, it only allows me to get eight bedrooms per unit. In this one I had a large, unfinished basement, so I’m digging out part of the basement and adding about six bedrooms in the basement area. It’s a very substantial renovation.

How I had to plan that renovation – it takes so much time, effort and resources that I wanted to make sure I got that return out of it. But that eight-bedroom rooming house will rent for about $995/room. So that bottom unit alone is gonna bring in $8,000. The one-bedroom/one-bath is gonna bring about $1,895, and then the top floor unit is gonna bring in about $3,200 to $3,400/month.

Joe Fairless: So the first one, the one-bedroom/one-bath you’re doing electric and just some mechanical stuff, you’re increasing rent from basically $1,400 to $2,000, and you’re investing 20k into the renovations. Does that include your time, or are you not involved in it?

James Dainard: No, I’m pretty involved in my own personal rentals, especially in these buildings that we’re trying to maximize the rentable square-footage. So it takes a lot of time laying out each bedroom in a very strategic way to maximize that space. In the very beginning I’ll be very involved, as far as the first 30 days planning. My plan is done, and then from there I actually a have a full-time project manager that takes over from there.

Joe Fairless: So does that 20k factor in the full-time project manager’s costs?

James Dainard: Our project manager usually does about 60 projects a year for us, so the net cost on him, what we pay our project manager is close to about $100,000/year. So his cost or investment is usually about $3,000 to $5,000 for him to oversee.

Joe Fairless: Okay, got it. So 33% return on the one-bedroom/one-bath, and then the two-bedroom that you’re converting to three-bedroom – you’re going from $2,200 to $3,400 in rent. Did I hear that right?

James Dainard: Yeah, that is correct.

Joe Fairless: And approximately how much will you be investing to do that?

James Dainard: In that top unit I’ll be about $50,000 to $55,000 just for that one. One thing — because it’s a rooming house, so I wanna make sure all the systems and everything is totally up to a new safety code of students living in there… So I am hitting everyone of the systems in there, redoing all the electrical, redoing all the plumbing… And then the cost is a little bit more for that unit also because I have to reframe out most of the structure to squeeze that third bedroom in.

Joe Fairless: Okay. And I think I actually did my math wrong… That one though, the one we’re talking about now, is 26% return, and then the other one, $2,000 to $1,400 – that’s $600, times 12, $7,200, and $20,000 – that’s 36%. It’s a little bit better than what I was saying earlier.

Okay, and both very good returns for each of those units. Now with the rooming house, it’s currently bringing in $2,100, and then what will it bring in after you’ve completed the renovations?

James Dainard: The bottom unit, the two-bedroom/one-bath brings in $2,100. After I’m all done, I’m gonna get eight bedrooms in there, so it’s gonna bring in $8,000. The renovation is gonna cost me about $125,000 just to do that unit, because I do have to dig out a part of the basement and pour a new foundation in that section.

Joe Fairless: A hundred and how much?

James Dainard: About $110,000 to $120,000 for that bottom unit alone.

Joe Fairless: Alright, so it’s a difference of $5,900 in rent per month, times 12 months, $70,000. These are gonna be very favorable numbers for you, as you know already… So that’s a 59% return on your investment.

James Dainard: Yeah. So at that point it was worth the work for me. I was like “Okay, this is gonna be a lot of work…” A lot of permitting issues, with a city as Seattle it takes a lot of time… But for me to get in a very core location and get those kinds of rents… Because I paid $975,000 for the building when I purchased it. So my all-in cash on the building is gonna be about 1.2 million, but it’s gonna bring in about $12,000, $12,500 in rent monthly.

Joe Fairless: When will it be completely renovated, and your new tenants will be ready to move in?

James Dainard: We’re doing framing and electrical right now. Actually, what I did to streamline some of the income is I pulled two separate permits for two of the units, the more easy, cosmetic ones… And then what this allowed me to do is those will be available for rent in about two months or so. The third unit, because it’s digging out the basement and it’s structural, I pulled a separate permit on its own for that part of the renovation, because in the city Seattle it takes about 4-5 months to get your building permit when you’re doing any kind of structural permit… So this allowed me to pick up the income.

Now once those two units are stabilized in two months, I’m gonna be able to collect about $4,000/month in rent as I’m waiting for my permit to complete the rest of it.

The rooming house will be complete probably in July/August of next year.

Joe Fairless: So about 12 for the rooming.

James Dainard: Yeah, about 12 months for the rooming house.

Joe Fairless: Okay. What’s something that if someone were doing this project — or I’ll make it less subjective… If you were taking on this project five years ago, what would you have done differently? Perhaps you would have overlooked a certain aspect of the project that you no longer overlook, or you would have budgeted differently? What have you done differently that you wouldn’t have done five years ago if you had this project.

James Dainard: It really comes down to the construction execution. About five years ago we would have just pulled a permit on the full building, but then what that would have done is I would have a loss of income on two of my units for 12 months as well… So that would have cost me $48,000 this year in rent income. So we kind of learned — it’s always nice to get into a building and do it all at one time, but with the permit process you can get around and streamline and speed up your construction projects by planning out each unit individually. You pay about triple in permit costs; it’s about 5k more in permit costs to do it that way, but you get things done so much quicker, and you can get the property stabilized a lot faster.

If I would have permitted the whole building all at one time upfront, I wouldn’t have been able to start on the whole building for 5-6 months, whereas right now I’m in the middle of two units already, after 30 days of owning the building, and then I’m waiting on the third unit to get permitted. So it’s all about how you structure your permits and your processes to get your job side going.

Joe Fairless: One of the recognitions your company has is Inc. 5000’s Fastest Growing Companies in America… How do you qualify for that?

James Dainard: It’s all based on income growth. You have to be in business for over three years, and then after three years they look at your net income on what’s your growth potential. You have to have three years of proven financials, and then they look at your third and fourth year to get the growth, and then ask to be signed off by a CTA and a certified accountant.

Joe Fairless: Cool. Well, congratulations on the growth and that recognition. What’s a project that you’ve lost money on?

James Dainard: It’s about 500 homes in the last 10 years… So I’ve lost plenty on a lot of homes. Recently I took a pretty big hit on a project I wouldn’t have thought I would have lost money on. It was in Shoreline, Washington. We paid 180k for a house in King County, Shoreline, which is very hard to find… The reason we lost money is we just ran into a ton of contractor issues. We just had a bad stream of them.

The guys that I’d work with for a long time – they all just ran into money problems, all at the same job, it seemed like… So I ran into two generals explode, and then a subcontractor explode, and then I did underestimate — there was a driveway they had to install because the grade was really steep, so you couldn’t really pull a car down to it; that’s how we got it so cheap… And I thought I grade it and create my driveway, and it ended up being a huge structural renovation project. We ended up having to spend about 35k on this driveway, putting in structural concrete walls… And then it was a major road too, so it had [unintelligible [00:15:08].28] The permit and the driveway cost alone were about 50% of my total budget that I had projected…

Joe Fairless: [laughs]

James Dainard: I just way under-budgeted… I thought I could get it done quickly, and it didn’t happen. And then the same time we listed last July, which was right when in Seattle the market kind of slowed down for a little bit, and there was a price adjustment about 10% off peak in these neighborhoods that were hyper-appreciating…

So it was just bad contractor, underestimated a huge structural permit issue for the driveway, and then a market slowdown, and I ended up losing about 75k on the house.

Joe Fairless: I would imagine the contractor issues, since you had pre-existing relationships with them – you’ve just gotta chalk it up with “Hey, that’s what happens sometimes in the business.” And same with the last thing, the market softening at some point in time, and then it corrected, and now it’s stronger, or whatever it is… But the middle thing, driveway being too steep and you thought you could grade it – that’s probably something that you can apply for future deals. Am I right in that assessment?

James Dainard: Yeah. Sometimes I think I get a little Superman complex; I’m like “Oh, I can fix this. I’ve done anything.” And you get in that [unintelligible [00:16:20].12] where you see that good deal and you want it so bad, but as an investor, you just need to slow yourself down sometimes. Going out and buying the cheapest thing isn’t always the best thing. Also, as you’re looking at these upfront – okay, it’s a structural item; what that also does do when you have any kind of foundation work or anything, you get to pour a lot of concrete rebar – most cities slow your permits way down. So not only did I have the other issues because I underestimated the driveway, but it cost me about four months of holding time just to get that permit, because it was a structural… Which equated out to about $25,000 in hard money costs.

So there were all these factors that going in I under-budgeted, and I under-budgeted my timeline. I had it as a six-month project, which is pretty typical for us, that kind of project, but it ended up taking 12 months because of all the additional permits and contractor issues.

So I definitely underestimated the driveway. It looks scary and it looks like a big deal. I should have spent a little bit more time really measuring out the grade, and I could have avoided the whole thing.

Joe Fairless: When you’re walking on the property and you take a look at the driveway before it got fixed, what did it look like

James Dainard: Let me put it this way – one of my project managers accidentally totaled his car in there…

Joe Fairless: Accidentally totaled his car?

James Dainard: He actually thought he could pull in the driveway… Because it didn’t look that bad when you look at it from the curb. You’re like “Oh, yeah, you can grade this down.” But then once you get on the other side of it, you’re like “Oh man, it’s a big drop.” So he pulled in and it literally just fell down across the front… So then he had a tow-truck try to get him out, and the tow-truck ripped the axle right off the car.

Joe Fairless: Oh, my gosh… [laughter]

James Dainard: So from the street it didn’t look as scary, but when you get down, it looked a lot worse. So it was something very noticeable if I would have just taken the time. I was more focused on the house, rather than the site around me… And if I really would have just paid attention to that, I would have avoided probably a nasty loss.

Joe Fairless: And when something like that happens on the job, who pays for the new car?

James Dainard: Well, his insurance covered it.

Joe Fairless: Okay, thank goodness.

James Dainard: So I got pretty lucky at that point. Yeah… But some of our guys drive our own trucks, trucks we provide them with, so they do it definitely on my dime and my insurance.

Joe Fairless: Yeah. It could have been $75,000 and a new car that was taking a hit on this…

James Dainard: The best advice I can give to people is just slow down sometimes, especially as you’re getting in. A lot of people hear from friends that have this huge success story on a flip, or a rental, and they just kind of jump right in before they build out their systems. Really, before you make that first purchase, get a good, dependable brokerage that can help you analyze the deals correctly, that speak an investor’s language, and they know how to crunch numbers, not just look at houses… And then find a good construction team to work with. Whether it’s a general and a bunch of subcontractors you can work with… For me, I kind of got away from general contractors doing everything, because it just creates too much liability. Even in that Shoreline house – if I wouldn’t have had a general doing it twice all the way through, I could have prevented a bit loss.

So just build your system, get a general that can maybe take on 50% of the work, and then bundle the rest up with other good, dependable subs that you can bring in, and then know their pricing. Don’t let the contractor dictate the pricing of what the budget is. Give them a template to work off of, know what the construction should cost, and then work it with the contractor that way.

And then find a very dependable money source. Who’s gonna be able to fund that deal for you in 24 hours, 48 hours if you find a really good deal in front of you? Or who’s the bank that you can work with, that you can get better rates and terms on if you can get longer closing terms? So build up your core people. Your brokers, your deal sourcing team, your construction team and your money team.

Joe Fairless: Thank you for that advice. Very good advice. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

James Dainard: Recently, I actually just read Brandon Turner’s Cashflow Rental book. I actually was just at a mastermind meetup with him.

Joe Fairless: Oh, cool.

James Dainard: I had never read his book, so I figured I need to read it… I actually listened to the audiobook on the way home. It was really good. And plus, I needed to read it, because I have a ton of clients coming into our office that speak Brandon Turner’s language, so I had to make sure I was up on all the latest terms.

Joe Fairless: What’s been the best ever deal you’ve done?

James Dainard: The best deal I ever did was actually a vacation rental property in Suncadia, Washington. The reason I say it’s the best ever is because I decided I wanted a vacation place for my family, but also make income; I researched different markets that have been deeply depressed, I targeted homes that I could buy below the replacement cost, and I ended up buying a vacation rental for a million fifty. I made about 25k/year for a couple years just on cashflow, and got a vacation there for free, and then I sold it two years later for 1.45 million, and I had to do basically no renovations on it.

Joe Fairless: Oh, man… Why did you sell it?

James Dainard: Because I saw about 150 building permits get pulled in the area… And the last time that area appreciated was because it just got overbuilt. And I was kind of looking at the rents that I could charge, and if there’s an oversupply, my rents are coming down, and then the value is gonna come down… So it was a really good profit deal, and now I’m looking for my next one.

Joe Fairless: How long ago?

James Dainard: I sold it last October, so it’s been about six months… But I do miss it though. It’s a fantastic area, just incredible.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

James Dainard: They can check out my social media. It’s @jdainflips. I go through a lot of daily walkthroughs on job sites, flip tips, different types of current construction projects we’ve got going on… We do about 50 flips at a time and have about [unintelligible [00:23:07].13] for renovations for buy and hold… And then also check out our website, www.heatondainard.com. We put out a ton of free education on just tools for investors to prevent losses down the road.

I’ve lost a lot of money over the last 12 years. I’ve made a lot, but I’ve also lost a lot, so we always like to show the public how we prevent those in the future and teach them the hard lessons before they have to experience them themselves.

Joe Fairless: And thank you for doing that. I’ve learned some things from this conversation, from mitigating risk on deals… For example, if you’re gonna do renovations on a building, don’t pull the permit for the full building. Get the permit in phases, that way you can still cash-flow on certain aspects of the building, if applicable. And then also thanks for talking through the deal that didn’t go according to plan, in many ways, and the $180,000 that was purchased that you lost 75k on, and what took place, and how you could have lost even more if that was your company’s car… So I’m glad the insurance paid for it for your project manager. Thanks for being on the show.

James Dainard: That was the only luck I had on that project.

Joe Fairless: Yeah, right. [laughs] Well, we’ll take it, because you could have doubled your losses relatively easy, depending on the type of car he was driving… So thanks for being on the show; I’m really grateful. I enjoyed our conversation. I hope you have a best ever day, and we’ll talk to you again soon.

Jason and his team help investors with marketing. This was born out of a need of his own, and realized others had the same need. We’ll hear tips to improve our own marketing, we’ll also hear how a company like his can help optimize your marketing for you. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“I quickly built an algorithm, or a spreadsheet at that time” – Jason Roether

Jason Roether Real Estate Background:

Runs an AI Technology company called Liberty AI

His company has been doing marketing in the real estate industry for over 12 years

Recently developed an AI software for investors that is patterned after the core technology used by Google and Facebook

How great would it be to buy a piece of institutional-quality, income-producing commercial buildings? Now you can… with BuildingBits. It’s NOT A REIT or a fund. BuildingBITS is a new platform for non-accredited investors, where virtually anyone, regardless of income, can select a building leased to a major corporation and earn money from it!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Jason Roether. How are you doing, Jason?

Jason Roether: I’m doing really well, thank you for having me on.

Joe Fairless: Yeah, my pleasure, and looking forward to our conversation. A little bit about Jason – he runs an AI technology company called Liberty AI. His company has been doing marketing in the real estate industry for over 12 years. He recently developed an artificial intelligence software for investors that is patterned after the core technology used by Google and Facebook. Based in Spokane, Washington.

With that being said, Jason, will you give the Best Ever listeners a little bit more about your background and your current focus?

Jason Roether: Okay, so I’ve got more of a salesy kind of a background, but also an analyst type background, because I had to be pushed into that spot. Basically, I started in the army, I went through the army, and went into cell phone towers. I did that for a number of years, and then I got into the car industry. The car sales was really great; I sold a bunch of cars among a lot of different [unintelligible [00:02:39].14] and they put me in the management really quickly, and had me start running dealerships, and that realm of things… And what I quickly realized is I didn’t know what I was doing in terms of advertising. I barely graduated from high school — I went right from high school to military, and I kind of just went from there, just kind of bust my butt to try to get going and make something happen, and kind of hustled my way through to just work for somebody doing cell phone towers, but own my own company. So I kind of had that go-getter atmosphere going for me.

Then I went into car sales, and I really had to dissect — they gave me $70,000/month for ad spends, and they said “Go spend this money and get us people to come in and sell our cars.” I had to figure out how to do that really quickly.

I ended up watching a movie in 2011, Moneyball. Did you ever watch the movie Moneyball?

Joe Fairless: I have. The Oakland Athletics?

Jason Roether: Yeah. Billy Beane, and all that… So that was kind of my a-ha moment. My a-ha moment was “Hey, there might be something more to these analytics than what I thought”, and I knew I had a way to get a little bit of ideas on analytics, basically through Google and Facebook. And what I did was I analyzed them. I just sat down and I said “What do all these things mean and what does it do?” and I quickly came up with an algorithm – or a spreadsheet back then; something that was handwritten – on trying to understand what cars were getting clicked on and how many times per day, and what that means to how quickly they sell, or how quickly they sell [unintelligible [00:04:17].19] or what the demand was and how I could tell even based on the clicks whether there was something wrong with that [unintelligible [00:04:23].09] or not.

With that being said, back at that time I joined forces with another guy who’s my partner. He’s been doing the real estate thing for a long time. He started cutting his teeth on the virtual tours and things like that, and more on the real estate side, but he was also avidly helping some investor people as well in that process.

Basically, we went on a journey to try to figure out how to use advanced analytics to not just sell cars, but to do a bunch of different other things. So we started analyzing the data, started just focusing our attention on looking at the clicks and those things, and basically what we learned is we could drop our ad budgets down from $70,000 to about $23,000. We were in a seven dealership group, and we were able to sell the most units per month at the highest gross profit margin… And we were the youngest dealership. I started when it was just raw land, so we had to build the whole dealership from scratch. We were the youngest and we were able to do better than the guys that had been there for years and years.

Joe Fairless: That’s impressive.

Jason Roether: So with that being said, we started going in the furniture route, and we started doing marketing for some furniture stores, and we got them to grow pretty large using our data and what we’d come to understand using the analytics and everything… And then we thought “Oh, we could sell these [unintelligible [00:05:46].23] mattresses using some similar analytics”, and what we did was we kind of scratched the surface on some AI stuff with that thing… And we really thought “Oh man, this is it. This is coming. This is new, this is fresh”, so we started beating down basically all of the doors in big data. We got the door slammed in our face quite a few times, but we were blessed enough to have somebody open up the door cracked and say “Hey, you can come in for a minute. All we have available in development on that low of a scale for an end user is basically real estate.” My partner suddenly said “Got it, I’ll take it.” That’s better than mattresses anyway, because the profit margin is so much better there.

So we’ve been about a year and a half in development, and what we have is we’ve got 200 million adult Americans’ data, and we’ve got AI software that analyzes 25 billion data points per day.

That’s where we’re at, and we’ve done some predictive modeling for the last year and a half to determine motivated sellers. That’s kind of a niche we wanna just go into; we really find that investors are forward-thinking. This is basically a different way of doing things, and you have to quickly adapt in this growing age of technology [unintelligible [00:07:05].05] open doors and everybody else is kind of coming in… We need an offensive weapon to give to our investors and we really think that this is that.

Joe Fairless: Is that the main value proposition, finding motivated sellers?

Jason Roether: That’s what we’re really focusing on. We’ve got some modeling for investors, we’ve got some modeling for a realtor, and a mortgage person. That’s where we first started – on mortgage and realtors, but we quickly came to realize that our target market for this forward product is more the investor side of things, because that’s who seems to be adopting it the best.

Joe Fairless: How is what you’re doing different from other services that provide motivated sellers?

Jason Roether: We’ve got a vast database. Let me just tell you this – basically, other investors and people like that are using different places to do that, so what we can do even, if you love that place and you love that company you’re with and everything else, you’re getting good web traffic, we can resolve the identity of 50% of all of your web traffic… Meaning we can get their names, addresses, phone numbers, anything else. We’ve got tons and tons of data on every single person.

Joe Fairless: So you’ve got all this data – how do you determine from a business standpoint how to make sense of it and what’s relevant and what’s not.

Jason Roether: We’ve got a 12-point predictive modeling, step one being “Hey, I’m just thinking about selling my house”, to step 12 being “I’ve just either lost it, or I’ve sold it to an investor.” And we go through because we’ve seen thousands of transactions that have taken place like this, and we get to about a seven or an eight out of the twelve, and then they come into our list of motivated sellers in your area. Basically, this person’s warm. They’re on some divorce, or the probate list, or whatever. This is an actual person, it’s searching in real-time because we’re checking 25 billion data points every single day, so we know their keywords, we know the content consumption, we know their response to campaigns and everything like that… So we’re looking at them in real time and stacking them up against the modeling to see where they’re at in the process, so we can go directly to them. We can send them a direct mail right as soon as they enter onto our list. We can do e-mails, we can do Facebook, we can do Google, we can do Twitter, Instagram, anything like that.

Joe Fairless: What are some challenges that you’ve come across building this type of platform?

Jason Roether: One of the challenges that we’ve come across are just basically learning the behavior. We’ve spent about the last year and a half learning the behavior of the prospects, so just trying to understand and feel that out. Obviously, our biggest hurdle is going to be that our software is learning, it’s a self-learning deal, so it’s only as smart as what you tell it to learn. If we’re not giving it enough data in the beginning to tell us “Go and look for this, then it takes a little bit longer to get to full optimization. Other than that, it’s a pretty smooth situation.

We also have an automated follow-up system that works with it, so when in-bound lead comes in and it shoots some sequence of text, voicemail drops and e-mails. We’ve got about a 60% response rate from that.

Joe Fairless: Based on your experience being in the industry, what is your best real estate investing advice ever for investors?

Jason Roether: My deal is I don’t think that it’s wise to be complacent right now, in doing what’s always worked in the past. It’s time to think of innovative ways. Even if you can’t afford to work with me, there’s a lot of other ways out there that you can be innovative, like I was when I was running car dealerships, and I had to learn how to decrease my ad spend, and basically go ahead and really be resourceful. To be a good net profit situation is to look at the tools you have in front of you and just maximize them. If you’ve got Google Analytics and you’re getting some good web traffic – well, how can you optimize that? Play around with it and see.

If you’ve got Facebook, on their reporting tools that they have, if you could go on their Insights and you can tweak your message a little bit and maybe get a better response rate… Just really don’t get complacent and thinking “Oh, I’ve put this on auto-pilot and it’s just gonna keep giving me the same thing.”

I was at a conference and I heard Gary V. talk about how we’re always on autopilot. We have offence. And really right now with the way that technology is going, you really have to be on the offensive posture to be able to grow your business and not lose market share to the automated places like [unintelligible [00:11:51].04] and things like that.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Jason Roether: I just recently read Think Bigger, but my favorite book is the Walt Disney autobiography.

Joe Fairless: What’s a mistake you’ve made in business?

Jason Roether: A mistake I’ve made in business is I would say not listening to feedback well enough and thinking that I knew best.

Joe Fairless: What’s the best ever way you like to give back?

Jason Roether: I love to give back through relationships. Of course, I give to my church, and things like that, but invest in relationships and spend time and bring value to people that don’t necessarily bring value to me, but I wanna see them go into the next step of their lives and not be stuck where they’re at.

Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on?

Jason Roether: You can go to our website, it’s LibertyAI.net. You can email me at jason@libertyai.net, and I’ll get back to you. You can DM me on Instagram. We’re @liberty_ai on Instagram.

Joe Fairless: And how much is it to use your company’s services?

Jason Roether: It’s based on scale. If you’re a new investor and you’re just starting out, we can help you with some smaller things… But generally, we do a full-service ad lead generation program, so basically we [unintelligible [00:14:01].06] so it’s basically in 5,000 blocks, and depending on your area, you should get somewhere around 60 leads per month out of that.

Joe Fairless: Thanks again, Jason, for sharing your advice. Thank you, sir, for your service as well in the army, and I appreciate you talking to us about your company and how it evolved from the sales data with a car dealership, to then applying that to real estate and finding motivated sellers. So I really appreciate your time. I hope you have a best ever day, and we’ll talk to you soon.

Chris is a principal in the National Tax Office of CliftonLarsenAllen, and is here today to tell us about a new deduction that can save real estate investors thousands of dollars in taxes. Also known as the pass-through deduction, Chris will give us the details on the the deduction and we’ll have a better understanding of if we can take advantage of the deduction. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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“If you don’t have employees you can also look to another factor on the amount of depreciable property that you have in your rental” – Chris Hesse

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Sunday, we’ve got a special segment for you called Skillset Sunday. By the end of this conversation you will have acquired or honed a skill that will help you with your real estate endeavors. Today we’re gonna be talking about taxes; don’t go away, it’s gonna be helpful for you, it’s going to be interesting. We’re gonna talk about taxes, and specifically we’re gonna be talking about Section 199 Cap A Deduction. With us today, Chris Hesse to talk through that. How are you doing, Chris?

Chris Hesse: I’m doing well, Joe. How are you doing?

Joe Fairless: I am doing well as well, and looking forward to our conversation. Chris is a principal in the National Tax Office of CliftonLarsonAllen, which happens to be our accounting firm for Ashcroft Capital. He’s also an authority on the recently enacted tax reform, Section 199 Cap A Deduction. Based in Richland, Washington. With that being said, Chris, first do you wanna give the Best Ever listeners a little bit more about your background? Then we’ll go right into the deduction.

Chris Hesse: Sure, Joe. As Joe said, I’m a principal in the National Tax Office. That means I get to answer income tax questions from people throughout the country, from all out of all of our offices of the firm. When they get to a particular hang-up on an issue, a new tax law, it’s my responsibility to find out what’s going on with this new tax law and how our clients can benefit from that. Then we distribute that information and continue answering questions throughout the country, and also we train other CPA on new tax laws as well.

Joe Fairless: Oh, that’s an interesting role. That’s gotta keep you on your toes, and keeps your mind fresh too, I imagine, because you’re always learning new stuff and seeing how it can be applied towards your customers.

Chris Hesse: Well, absolutely, it does keep us on our toes, because you’re in front of 100, 200, 400 CPAs, and they’re all sharp people as well. They’re there to absorb whatever I have to tell them, and hopefully I’m telling them the right things. Then I suppose the other thing that pushes my buttons on that is taking their questions and on the spot hopefully being able to answer them with a cogent and precise answer. Everyone likes their CPA to be precise.

Joe Fairless: Yes, yes, and I think that goes hand in hand, CPA and precise. Those words tend to be next to each other. So with Section 199 Cap A Deduction, why are we talking about this?

Chris Hesse: Yeah, yeah. Other terms for that is the pass-through deduction, people may have heard about that, or 20% qualified business income deduction… It goes by a few different names. Like any other new tax law, I suppose it takes a little while to settle on what we might call that, or everyone might call that in the future… But it’s a 20% tax deduction that people may claim if you’re a sole proprietor, or a partner in a partnership, or a shareholder in an S corporation, where this income is reported on your individual income tax return.

You get a 20% tax deduction — I call it a phantom deduction, because it doesn’t actually require you to pay out an expense. Usually, you have to pay somebody something in order to get a tax deduction; but you get this one just because it is qualified business income. That was the effect, Joe, of reducing the effective tax rate that a person has on their business income.

Joe Fairless: So how do you qualify?

Chris Hesse: The easy answer is I’m in a trader business, I’m an independent contractor, I may or may not have employees – I’m generating income, of course, from that business. You have to have business to have this deduction… And it’s much more complex than that, but also in the real estate, that’s your show here, the real estate – if the real estate rises to the level of a trader business… And this is the sticky thing with regard to the income tax law, because it’s not clear that every rental real estate qualifies as a trader business, rises to the level of being in a trader business. You may ask, “Well, why not?”

Joe Fairless: Right.

Chris Hesse: Well, the IRS, backed up by the courts – the courts say “You have to be pursuing a profit…”, yeah, we all wanna pursue a profit, “…and you have to be doing this with regularity and continuity.” This is just from my viewpoint, the person who owns their own property and is responsible for maintenance, cleaning… If it’s commercial property, you have the building that you’re maintaining, parking lot that you’re maintaining, sweeping, snow removal… Maybe no removal down in your area, but snow removal up here… That’s doing things with regularity and continuity. And because you’re doing it for a profit, that should rise to the level of a trader business. You might ask, “Well, what doesn’t then?”

Joe Fairless: Right.

Chris Hesse: Well, a triple-net lease… There’s a lot of concern on triple-net lease, where the tenant is responsible for everything; all I get is a monthly check–

Joe Fairless: But you have to get that check from your mailbox and deposit it on a regular basis.

Chris Hesse: [laughs] You have to make that effort to go out to the mailbox…

Joe Fairless: You have to sign the back of the check.

Chris Hesse: But not in today’s environment. We can have that automatically deposited, wired to me. [laughter]

Joe Fairless: So the takeaway here is if you have triple-net, make sure they mail you a check, versus do ACH. That way you can qualify.

Chris Hesse: Yeah, I think it’s gonna be a little bit more cumbersome than that.

Joe Fairless: I imagine most accountants are aware of this, [unintelligible [00:07:50].00] you don’t know what most accountants are or aren’t aware of; I’m gonna put on my attorney hat… You have no idea what most of the accountants are aware of, but I imagine this is fairly well-known… So should a real estate investor who wants to take advantage of this do anything special in terms of speaking to their CPAs, or preparing something in advance for the tax preparation, to make sure that they’re gonna be able to receive this?

Chris Hesse: There are some nuances on this, and this is where our position in instructing other CPAs gives some enlightenment as well, because we find in providing these seminars we get a feel for just how much knowledge there is out there in the participants… And I can tell you that there are participants and instructors. There are other instructors out there.

We’ve heard about instructors who say “Well, no rental activity qualifies.” Then there are other instructors that will say “Every rental activity qualifies.” And neither one of those is a correct statement. It’s coming from me, but neither one of those is a correct statement. We do have to make these evaluations of intent to make a profit, performing this, where the landlord, or the landlord’s employees, or the landlord’s agents are doing something with regularity and continuity.

In the extreme – let’s just take a ground lease underneath a skyscraper in Downtown L.A. It’s a 99-year lease. The landlord just gets a check. There’s nothing for the landlord to do. Very doubtful if that qualifies. But again, I can just tell you that there is a wide range of spectrum. This is a brand new law, and just like any other brand new law, sometimes it takes ten years before we know all of the nuances, because somebody has to litigate against the IRS as to their particular position, and the court needs to rule…

Joe Fairless: I’m calling not it for that litigation. I don’t wanna be a front runner.

Chris Hesse: You don’t wanna be that person?

Joe Fairless: No, I don’t wanna be that person.

Chris Hesse: You don’t wanna be the test case for it?

Joe Fairless: [laughs] Sorry, go ahead.

Chris Hesse: No, but you get the idea… With new legislation, we need to bring up the tax preparers, the CPAs, get everyone familiar with what it is that’s going on with this new tax provision, because there’s no body of law that gives this a guidepost as to what to follow. All we have is the raw language of the statute, and as of last Friday, the IRS issued final regulations that give us some information on this.

Joe Fairless: Anything else that we should talk about that we haven’t talked about, as it relates to the pass-through deduction?

Chris Hesse: Sure. There’s more nuances in that. I said that you get this deduction of 20% if your rental rises to the level of a trader business, but there’s more to it than that, in that of course there are limitations. As your income goes up, you have to meet a couple more tests. The higher-income people – you can ask me later as to what higher-income means – their deduction is limited to a factor on the amount of wages expense that they pay. Do you have employees? And if you don’t have employees, or you don’t have enough employees, then you can also look to another factor on the amount of depreciable property that you have in your rental.

Joe Fairless: Got it. And how can the Best Ever listeners learn more about either this, or your company? …if they want to either have a discussion with you or just learn more about CliftonLarsonAllen.

Chris Hesse: They can look at our website, at claconnect.com, and find an office near them, or there’s a wealth of information on the website that has all manner of tax information that’s available for free… And — well, the value of it is indicated by its cost; if a person wants to learn the nuances because their ownership and their generation of a considerable amount of net rental income or business income, perhaps they should visit with a professional and find out just “How I can restructure my particular ownership, or what might I do in order to enhance this tax deduction for me.”

Joe Fairless: Chris, thank you so much for being on the show, talking about Section 199 Cap A Deduction, or the pass-through deduction, as it’s known in other circles… And just educating us on this being a thing, number one, if a Best Ever listener has not heard of it, and then also some of the nuances that are involved with it, to be aware of it. Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Unlike 99.9% of real estate investors, Jennifer saw opportunity in 2007 and 2008. She was able to buy projects that builders were losing for pennies on the dollar, finish them, and sell them for huge profit. Inventory was everywhere, good labor was cheap, all she needed was the capital to get the ball rolling. Find out how she did it in this episode of The Best Real Estate Investing Advice Ever Show..If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

We profile 1 nonprofit or cause every month that is near and dear to our heart. To help get the word out, submit a cause, or donate, visitbestevercauses.com.

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Jennifer Beadles. How are you doing, Jennifer?

Jennifer Beadles: I’m doing great, Joe.

Joe Fairless: Well, I’m glad to hear it, and welcome to the show. A little bit about Jennifer – she has been a real estate investor since 2007; also a builder and a founder of Agents Invest. In case you’re wondering, Agents Invest is a referral service for real estate investors to connect with investment-savvy real estate agents in markets across the country. She also has her GC license, focuses on new construction and owns a 17-unit rental portfolio. Based in Snohomish, WA. With that being said, Jennifer, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jennifer Beadles: Absolutely. My background – when I was 21 years old I bought my first house, and that really kind of catapulted me into real estate investing. I got hired on as an admin for a local builder/developer, and really just became totally immersed in the building development. I did everything from bigger developments, we did [unintelligible [00:02:01].08] we did single-family houses, small multifamily… And then also on consulting projects for other builders.

I did that for two years. That was kind of the best and worst time to get in – that was 2007 to late 2009. When I got started, everything was booming, life was good, everything was great. By 2009, everything was not so great; the banks were literally coming to us saying, “Hey, we’re taking this 40 acres back. We don’t know what it is, we don’t know what we have.”

So kind of coming in at a really early age, I got a really good viewpoint of a great market and a bad market. I took that opportunity and started what I call the build-to-sell strategy. I quit that company the day after I bought a house-hack duplex… And I took friends and family and said “Hey guys, it looks like there’s blood on the streets, but I see a ton of opportunity out there.”

I kind of worked with some local builders that were losing their projects – what I mean by losing their projects is literally they had permits and had foundations in the ground and the banks took their loan… So I came in and helped them negotiate some short sales, and kind of pulled some friends and family together, we purchased those projects, finished them out, and just made a killing on the profit side. It was a great time to build, because the costs were down, there were a lot of available workers who were willing to get things done.

So yeah, I really kind of focused on that. That was my starting strategy with real estate. I had also gotten my real estate license about six months prior… So I was kind of doing a couple different things with that. I was taking the opportunity of some projects that we were able to hire for a really fantastic price, able to acquire some listings as a real estate agent and doing that, and then able to kind of help friends and family make some really great investment opportunities, and a great return on their investment while doing that.

I have had to pivot as the market changed, so I kind of took a lot of the profits that I was making on that side and turning that into passive income streams. So from build-to-sell we kind of went into house flipping, and then some buying rental properties… And we have had more units in the past; my husband and I have been kind of taking the properties that just aren’t cash-flowing as much and going into other properties that will just cashflow more.

Currently, my focus — kind of two things, really… Just getting into more new construction projects. We took about two years off from building, just because we were doing way too many things – we were doing building, and flipping, and I was helping other investors build and flip and buy rentals, and we were buying houses at the courthouse steps, and doing a lot of different things… We were doing house-hacking and live and flips as well, so I kind of said, “Okay, let’s put a pause on the build-to-sell” and now we’re getting more back and more focused personally on the build-to-rent, on that strategy, and then also doing some out of state investing.

Joe Fairless: How long have you been investing? 2007, so that’s about 11 years… There are a lot of professionals who want to do what you’re doing, and start as an admin or on the ground level of a company, but don’t make the transition from an admin for two years to then you’re working with local builders who are losing their projects, negotiating with banks on short sales and then finishing out the projects with your own crew and people that you hire, and then bringing in investors along the way… What things did you do that you think might be unique, if you were to look at it objectively, that other people might not do?

Jennifer Beadles: That’s a really great question. I think for me – I get confidence in numbers, so I saw the opportunity in these projects. I think the numbers worked so well… I worked them sideways and backwards and said “Gosh, okay, if we can’t sell these things, what could they rent for?” So I think my ability to see all angles of these projects and then confidently say “Look, investors, I’ve worked the numbers sideways, backwards and these different ways. Here’s how I think this thing can work.” I think that’s one thing.

Then I think the other thing is I’m pretty good about putting teams together. I know my strengths and I’m very aware of my weaknesses… So when I was now doing these projects on my own, not through the company that I had worked for, I went to the superintendent that they had laid off six months ago, and called him out and said “Hey, what are you doing?” He said, “Well, look, I’m about to go get a job at Home Depot”, because no one was hiring; they weren’t’ looking for superintendents back in 2009… And I just said “Look, I can’t pay you as an employee, that’s not really the business model I’m going after, but if you’re willing to take a chance with me, get your GC license, you know how to build (he’d built hundreds of houses a year), and I have investor capital – we can finish out some projects.” He took a chance on me.

So I think it was just these two things – having the confidence in yourself that you can do it, and then assembling the right team to make those things happen.

Joe Fairless: What do you think are some characteristics that people look for in order to take a chance on someone?

Jennifer Beadles: Well, I think confidence is really important. For me, I want to deal with confident people… But confident people that also will explain the downsides. I think sometimes there’s arrogance and there’s confidence. I think sometimes arrogance comes in where you think that you won’t lose, there’s no downside or there’s no potential to lose, and that I tend to steer clear from. But confidence is someone that can accurately explain the numbers, explain the business models, and then say how they’ve kind of covered any potential losses, or where losses could be found, and kind of their plan for mitigating that. I think that that’s super-important.

I thought, okay, if I’m an investor in what I’m offering, what would be important to me? What would I need to know in order to take the next step? I just kind of covered all bases, really. That’s how it worked.

Joe Fairless: You had two years working as an admin, and then right after that, during the downturn, you were negotiating with banks and helping the local builders who were losing their projects negotiate with the banks on short sales… How did you learn how to do that?

Jennifer Beadles: I kind of learned as I was going through it, but I also had a lot of people to lean on. There were a lot of other agents that I had made contacts with… Short sales were very new in 2009. It was kind of like “How do we deal with this?” And prior to that, I also had some banking relationships. The banks would come to us and they truly didn’t know what they were foreclosing on or potentially doing deeds in lieu on; they just didn’t know what stage of construction or stage of short platting these projects were in… So I just kind of understood what the bankers were looking for.

And the banks were under a lot of scrutiny too, with the FDIC… So it wasn’t really that difficult of a conversation. Of course, I wanted to help the other builders out, trying to get them in a situation where they wouldn’t be left with a large note with the bank either… So I was kind of just really looking out for everyone, and to be honest, Joe, I didn’t really know what I was doing; I just asked the right questions and really kind of thought “Okay, how can I make this a win for everyone, not just me and my investors, or just the builder?” I think it was just really kind of trying to put everyone together that made sense for everyone.

Joe Fairless: You’ve got a 17-unit portfolio currently – what does that consist of?

Jennifer Beadles: Small multifamilies. Mostly two to four-unit properties, and then we’re building another one right now, so that will be 19 units with that one. But mostly I love bread and butter duplexes, triplexes, fourplexes.

Joe Fairless: And why are they bread and butter for you?

Jennifer Beadles: They’re easy. Most of our properties have decent yards, and they’re easy to rent. Our tenants stay a long time, because they’ve got a nice yard, they don’t have tenants above them or below them; a lot of times our duplexes — my probably favorite product is a duplex where the garages connect the units… So you’ve got [unintelligible [00:10:10].02] maybe 20 feet or more.

For us, that’s just easy. It’s easy to finance… I’m very familiar with the income ratios that we need, and things like that. For us it’s just easy. The tenants stay a long time. Half of our rentals are rented out through this program called Supported Living. I’m gonna keep saying easy — most tenants stay often times 10-15 years, their rents are guaranteed, they come every month… There’s a provider that provides care for these tenants, so we don’t get involved in anything on that end… So yeah, for us it’s just easy.

Everything we own, kind of oddly, is single-story, so we don’t have to deal with decks, and two-stories, things like that. We maybe get one call every 45 days. We self-manage everything but our out-of-state, and it’s just easy. Easy and profitable.

Joe Fairless: The Supported Living program – how did you hear about it and why would other landlords, if you’re looking at it objectively, not do that program?

Jennifer Beadles: The way that I heard about it was I was looking at a property that was a triplex, and it was listen actually as a group home, which is a totally different category of what this property is. So it was listed as a triplex, as a group home, got it under contract because the price was just great, and learned that it actually was in a group home, which requires licensing and certifications and things like that.

So I just learned about the program, I asked a lot of questions… The tenants were all intellectually disables, so they were with disabilities there… And we loved it so much that we started acquiring more units specifically for them.

The potential downsides though are that there’s a little bit more wear and tear to the properties. Sometimes the tenants, if they’ve got walkers or things like that, you’ve got some walls [unintelligible [00:11:48].25] and things like that… Or on occasion, if they’re having a bad day, something will happen to a wall or a door, so we’ve gotta kind of deal with them on that…

I like the long-term… We kind of go for hassle-free rentals, and knowing that we’re not gonna have tenants turn over every year or things like that… No matter if rooms are vacant or whatever, we always get the rent. So there’s a lot of positives, but like I said, the downside is there’s a little bit more wear and tear.

Joe Fairless: And why not have 100% of your rentals instead of half be on the Supported Living program?

Jennifer Beadles: We’re actually working towards that. This new duplex that we’re building right now, it’s gonna be for the Supported Living program. Some of our rentals are in areas where they don’t have a need for that, because the providers also have to consider the staffing. In some of our areas they just don’t have staff coverage, so that’s really the only reason why we haven’t converted those.

My hope would be that they would find staff in that area and we can kind of convert those throughout the years.

Joe Fairless: Of the 17 that you’ve got, not including the duplex that’s being constructed, how many are out of state and where are they?

Jennifer Beadles: We just have the one duplex right now in Greenwood, Indiana, which is just outside of Indianapolis. So there’s two units there.

Joe Fairless: And you’re in Washington state, so how the heck did you end up buying a duplex over in Greenwood?

Jennifer Beadles: Prices got pretty expensive here in the Seattle Metro a couple years ago, they kind of skyrocketed, which is great when you own properties, not so good if you’re looking to acquire more… So I kind of went about this (I guess) journey of investing out of state. I had been very pro Seattle market for a lot of different reasons, and didn’t really have a reason or desire to invest out of state… And a year went by and we hadn’t bought anything yet. I said, “Okay, we really need to start looking…”

So yeah, we just started doing research. I was looking for areas that have population growth, low unemployment, low crime, good price-to-rent ratios… I had identified a couple cities, and then I went about building the team, because I realized you could find the best deal in the best market in the world, but if you don’t have the right team, then it could be a really terrible deal.

So I just happened to kind of line up a good team there in Indianapolis, and they found me the exact product that’s my favorite; they found me a rambler duplex, 3-bed 2-bath each side, 1,200 and some change square feet, units connected by the garage… So I went for it, and I got a really great deal, a really good property.

Joe Fairless: What was the all-in price and what’s it rent for?

Jennifer Beadles: The purchase price was $155,000. We did go ahead and renovate that, so we put about $19,000 into the renovation on that. It’s currently renting for $2,235, and it’s now valued I think at about $250,000.

Joe Fairless: You mentioned earlier that what attracts people to take a chance on someone is confidence, but also not only “100% confidence, let’s go full-steam ahead”, but also explaining the downside… So what’s a deal that you’ve done that didn’t work out?

Jennifer Beadles: I had one early on when I was doing a lot of flips… I was buying at the courthouse steps, and what had happened is I had had a lot of success really early on, and just to be honest, I started to get pretty confident in myself and my abilities. I had this discipline though, before every auction I would set a number, and I would say “If it sells for a dollar over this number, then that’s okay. I’m stopping at this number.”

So this particular Friday I actually had a couple of friends, agent friends, that were coming to the auction to see how it would go. And I’d set a number on a certain property, and because my friends were there, and I was kind of showing them how it goes, I found myself at a point where I had won a property (won the highest bid) and I ended up being about $30,000 higher than my stop number. Sure enough, that was the only property that I’ve ever lost money on. I ended up losing about $19,000 on that flip.

It was a fantastic lesson. One, I was kind of showing off in a way to my friends… I really just wanted to win at the auction and kind of show them “Okay, this is how it’s done, this is how you do it.” And there was a couple other things… With every property there was a couple characteristics that I’d look for; I’d always look at the PUD meter (the power meter) and if the little tag was red, that meant that there was a safety issue and it would shut off due to that. If the tag was yellow, it was shut off due to non-payment; green means it’s on. And I don’t like basement properties, but of course this property was a basement… And I didn’t check the power meter that day, and when I went back after buying it, I realized it was yellow, which meant power was off… And it has a basement, which means that [unintelligible [00:16:30].15] and when there’s no power and it’s the rainy season… Anyway, I got into the house, and the basement had standing water, and mold… So anyway, this property taught me a lot of lessons, and I paid dearly for it and I was in some ways kind of happy to pay that money, because that was just a really good lesson, and… Hey, stick to your numbers, don’t try to show off, and stick to the checklist on these properties.

Joe Fairless: What are some daily habits that you have?

Jennifer Beadles: Daily habits… I’m a big believer in you have to kind of take care of yourself – your mind, your body – in order to perform at the highest level. For me it’s eating really healthy in the morning, kind of doing some morning routines… I’ve got a three-year-old, making sure that she has some attention early in the morning before she goes where she goes… Those are kind of personal habits.

Then I also — not so much daily, but every single week I review our investments and I look for opportunities to improve, I look for lessons to be learned… So kind of some of those things – a lot of review and reflection.

Joe Fairless: The “eat really healthy” – what do you eat?

Jennifer Beadles: I do a lot of greens. My morning smoothie, I’ve got this Udo’s Oil, which is Omega threes and Omega sixes… I do some protein powder… We have a little garden at our house, we live on an acre and a half in Snohomish, so I do my kale every morning in my smoothie, powder greens, things like that – just really starting the morning off with just a lot of nutrition… Because I talk on the phone a lot; I look at deals all day long, so I’ve gotta be really on it.

Joe Fairless: How much of a focus is Agents Invest of yours? We haven’t even talked about that.

Jennifer Beadles: Yeah, so that is actually a newer focus. About two years ago we had gotten to this place where our portfolio was paying out six figures every year, and we were really happy with where things were, but I felt like I was missing something. What I was missing was contributions.

Prior to that, my husband and I didn’t really openly share about our portfolio and what real estate investing had done for us; it was just kind of mostly with our investors. So I made the decision to be more focused on contribution, and really what turned into with that out-of-state deal that I bought – I said “Gosh, it was actually kind of difficult for me to put a team together out of state. I wonder how many other investors have experienced the same thing.” They’re wanting to invest outside of their local area, but maybe running into issues of putting teams together, or just not finding good people.

So I started teaching and sharing – I do a monthly meetup, and really kind of my goal for Agents Invest is to share strategies and help people learn about real estate investing… And then number two is connect them with vetted teams in different markets, where they’re gonna achieve a high cashflow, they’re gonna get equity, and they’re gonna have the ability to connect with really great people to help them execute on their strategy.

So I spend a good amount of time doing that as well; that’s just my passion project. The weekend before last I actually had done something totally new. We flew in about 21 investors into Oklahoma City, and I showed them around the city, met with the teams that I have there, and we just had a lot of fun. We did a lot of networking, different activities, and then also looked at a lot of properties, some small apartment complexes, and then a lot of 2-4 unit properties as well.

That’s really my passion project company that I’m super-focused on. I probably don’t acquire as many units as I could because I’m just really into helping other people get into deals.

There’s times where my husband is like “We should have bought that one”, but there’s just something about helping other people learn and grow and build their own portfolios as well that I just love.

Joe Fairless: How did you – or maybe you didn’t – monetize Agents Invest?

Jennifer Beadles: That was something — being a licensed real estate agent (I’ve been licensed since 2009) it’s very common for what we call referrals, right? Someone let’s say in Seattle is moving to Texas; I would call up an agent friend in Texas and said “Hey, I would like to refer you a client.” That’s super-common, it happens all the time within kind of the regular business. But when we’re talking about this investment side of things it’s a little different… So I took that same model and kind of my value-add really for both sides — again, I’m always looking for ways where everyone can win; with these agent teams – I go to them and really personally vet them. I spend a couple of months making sure that these teams really know what they’re doing and really can provide value and add good connections for these investor clients that I’m referring.

So we have a referral agreement, and I just say “Guys, if you can do the right thing for me and my clients, then I will make some referral connections for you guys.” So yeah, we have referral agreement [unintelligible [00:21:07].02] and I’m compensated by the percentage of the commission.

Joe Fairless: What questions do you ask to vet them?

Jennifer Beadles: A lot of things related to just the basics. How do you calculate the cap rate? Tell me about how you calculate cash-on-cash return… A lot of times on the residential side we’re not talking IRR, so that’s something that I don’t typically get into with them… And then I just tell them to send me their deals, tell me the best deal that they’ve seen recently…

Again, this is all kind of focused on buy and holds. We’re not necessarily focused on flips in these different areas. But if they really know what they’re talking about, and a lot of them also own their own rental properties, then I just kind of go through the motions with them of looking at their deals, making sure that they’ve answered all the proper questions… And then also, if they can tell me what their areas of weakness are.

A lot of times I’ll kind of coach with these agents too, and they’ll say “Hey, I’m really good at finding deals, but I’ll be honest – the number crunching side is not my strength.” Then I’ll send them my spreadsheet and we’ll kind of go through the numbers with them until they can accurately provide proformas to these investors.

So it’s a lot of different things. It’s questions, but then also having them show me actual deals.

Jennifer Beadles: Best real estate investing advice ever… I think just getting started. A lot of people get analysis paralysis, and there’s people that I’ve talked to that they’re like “You know, I’ve been looking into real estate investing for two years and I just haven’t found the right deal yet.”

A lot of times to those people I just say “You’ve just gotta do a deal.” And that might sound like kind of silly advice, because of course, we all want to do the best deal ever, but I think you learn so much even from that first deal.

The first three deals that I did were not very good, but I had to get through those three to learn the investing strategy and criteria that I have now. So had I not just kind of failed forward in the beginning, I might not be where I am today… So really to do a deal.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Jennifer Beadles: Gosh, I’ve probably read the 4-Hour Workweek like seven times. I just re-read it and re-read it, because I’m just always at a different place when I read it, and I always kind of get something new every time I read it.

Joe Fairless: Best ever deal you’ve done that we have not discussed?

Jennifer Beadles: The live and flips… So probably the last one that we did – we purchased it in 2011 at the courthouse steps, sight unseen, and then sold it four years later and all we had to do is paint… We netted about $275,000. Then of course we got the capital gains exemption on that, so it was great.

Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about already?

Jennifer Beadles: I had a deal that I got under contract for $25,000. It was a commercial zone with a single-family residence with a billboard in the front yard. I’d gone out of town and the bank had needed one more signature for me to fully execute the contract, and I didn’t see the e-mail, so they gave it to someone else. Every time I drive by that, I get very disappointed that I wasn’t paying attention.

Joe Fairless: Oh, man… And you said there was a billboard in front?

Jennifer Beadles: Yeah, commercial zoned, and a billboard, and a single-family house, for $25,000.

Joe Fairless: [laughs] Okay, we won’t talk about that anymore. I can tell it still stings a little bit.

Jennifer Beadles: It hurts, it hurts.

Joe Fairless: Best ever way you like to give back?

Jennifer Beadles: Just sharing my story and just meeting different people. I love it. I love sharing what’s gone really well and I love sharing my mistakes.

Joe Fairless: And best way the Best Ever listeners can get in touch with you?

Jennifer Beadles: They can find me at AgentsInvest.com. I also have a blog, reimillionaire.com. It’s kind of just some fun, funky stories about things that are going right and things that are going wrong; it’s got some fun stories about my current new construction project that is a great read… So yeah, either way.

Joe Fairless: Jennifer, thank you so much for being on the show. I learned a whole lot, and you truly are inspirational with how you entered into the industry and were able to hit the ground running so quickly at a very challenging time, in 2009, whenever you left. You got that house-hack duplex, then you quit your job the next day… That’s a tough period in the economy, and instead of trying to swim upstream, you went with the current and you started helping local builders who were losing their projects, and you negotiated short sales and then finished out those projects.

Then also with that type of mindset – that’s why I asked you how you can have others take a chance on you, and not for you, because you’re past that point, but for the Best Ever listeners who are looking for somebody to take a chance on them… And you said having the confidence, but also with that confidence, explain the downside, so have the full 360 picture in mind when you’re talking to people.

Thank you so much or sharing your story, your advice and the projects that you’re working on. I hope you have a best ever day, and we’ll talk to you soon.

Elliot and his wife flipped 28 homes last year that made them $497,000, and they only worked 20 hours a week or less! In 2018 their plan is to work more and complete more deals. Hear how they were able to make that much money while working so little.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Trevoris my real estate, business, and life coach. I’ve been working with him for years. Spots are limited, so be sure to apply today!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Elliot Smith. How are you doing, Elliot?

Elliot Smith: Good, thanks.

Joe Fairless: My pleasure. Nice to have you on the show. A little bit about Elliot — he and his wife own a real estate investment company called C&E Real Estate. In 2007, they flipped 28 homes with a gross profit of $497,000 while working under 20 hours a week. Based in Vancouver, Washington. With that being said, Elliot, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Elliot Smith: Yeah. That was actually 2017, so last year, not 2007. But what we’re doing basically is we go direct seller for most of our properties and we’re buying and rehabbing them, in Vancouver market and also Eastern Washington and Tri-Cities. We have a full partner in Vancouver that helps manage the rehab process, and then we’re solo in Tri-Cities. So we will wholesale sometimes, but mainly we’re just going direct seller, buying properties at a discount, and then fixing them up and reselling them.

Joe Fairless: What are some of the most effective ways that you’re getting the homes at a discount?

Elliot Smith: We basically do a lot of direct mail. Sometimes we do some cold calling as well, but for the most part I think what sets us apart is just our abilities when we’re actually dealing with sellers. I think we have a lot higher closing rate than most people do, just because we can feel out what their needs and wants are, and help solve their problems a little bit better than most of our competitors can.

Joe Fairless: Can you tell us a specific example, maybe tell us a story about you doing that – maybe the problem and then how you approached it?

Elliot Smith: Yeah. One, for instance, we sent a letter, the brother had passed away, and so we were buying the house from the other brother who was handling the estate. And when we went there to the appointment, there was not just us, but there was a realtor there as well. The property needed work, and so after dealing with them, the other realtor that showed up, she knew us and our credibility, so she was like, “Hey, you probably should work with these guys… Even though you could probably list it and get a little bit more money.”

Tt that point, we were able to solve the problem with no inspections, as is, and kind of abide on his timeline and be patient with him. The guy did nickel us up a little bit, but we still got a really good deal. But we were able to be there at the right time and not pressure him, not have to have a deal. I think that’s the important thing – if we get the deal, great; if we don’t get the deal, then that’s okay too. So we’re never pressuring anybody to sell us their property. We just basically — when we say it’s on their timeline, it’s totally on their timeline, and we’re not pushing and pushing and pushing this on. We’re making them feel comfortable that, “Hey, we are the right choice; we are professionals, and this is how we can provide value to you.”

Joe Fairless: How do you balance the desire to close deals with not having a pressured timeline?

Elliot Smith: I think that balance comes from the way my wife and I live our life. We live basically debt-free. The only debt we have is our small mortgage and then rentals, and we live well below our means, and so we don’t have to close a deal. So if we get the deal, that’s great, but if we don’t, we don’t need that to live. So I think that really sets us up for success in that realm because we’re not saying, “Oh, I gotta have a deal because I’m going to pay my car payment or my high mortgage payment or these things next month, because if not, I can’t afford it.” And so I think that really puts us in a solid situation to be patient, and if the deal comes, the deal comes; if it doesn’t, then that’s okay too.

Joe Fairless: Can you tell us the numbers of the last deal that you did?

Elliot Smith: We have six going right now, that we’re working on right now. I can talk about that one that I was just talking about, how we solved their problem. We bought it for $110,000. We’re probably gonna be all into it for $50,000 on the rehab and we pre-sold it for 235k. So we’re all in at $160,000, pre-sold it for $235,000, we take out a couple of commissions, we’re probably going to make right around $60,000, somewhere in there [unintelligible [00:06:28].13].

Joe Fairless: Over what period of time from start to finish?

Elliot Smith: We bought it in November and the only reason we haven’t closed on it yet is because of the 90-day FHA, so we’ll close in 95-96 days.

Elliot Smith: And that’s a split. I have a partner in Vancouver, so I split everything with my partner.

Joe Fairless: And how do you structure your partnership? Who does what?

Elliot Smith: I’m pretty good at finding the deals and dealing with the homeowners, and he’s good with the homeowners as well. But we run the marketing, we run the phone calls, we run and set up the appointments, and he’s really good at putting it back together and managing the rehab process. So he’ll put them put them back together and then he’ll sell them, and then we’ll kind of split them 50/50 from there.

Joe Fairless: You find the deals and you secure them, and then it sounds like he does the rest?

Elliot Smith: He puts them back together and then he’ll sell them.

Joe Fairless: Cool. Is that where the less than 20 hours a week thing comes into play, where you flip 28 homes but work less than 20 hours a week?

Elliot Smith: Yeah. That was totally 2017. We moved back to our hometown, so we’re trying to do it. We’re going back and forth between Tri-Cities and Vancouver, but this year we’re kind of ramping up to try to work more hours just to build up our reserves more and learn more. Because a lot of the time-consuming stuff is — we do a lot of time-consuming stuff answering phone calls, doing the marketing, things like that, and then this stuff is time-consuming putting them back together, so we kind of split that up. And I also have my wife who runs half of our business, so put us both together and we’re probably working 40 hours a week. But she runs half and half for us.

Joe Fairless: Got it. So between you and your wife, you’re working 40? Did I hear that correctly?

Elliot Smith: She’s probably working 20, I’m probably working 20, and we work different times. I’m a very up and down salesman more like, and she is more linear to [inaudible [00:08:30], and so she’s way more structured, and then I’m more like, I’ll burn out, work all day, and then I won’t work for a couple of days, or I’ll just like do minimal stuff and then I’ll go golfing. And she’ll be like, “No, I’ll just work four or five hours a day, get my stuff done, the things I gotta do.”

Joe Fairless: How come you three decide to fix and flip versus wholesale primarily? I know you do wholesaling, but why not wholesale exclusively?

Elliot Smith: Because I feel like we have the opportunity, we have the financing and the money, that we can make extra money. Again, it goes back to we don’t need to make a check right now. So if we can hold it and flip it and we can make 5k, 10k, 20k, 30k more, then it makes more sense to load a pipeline that way for us.

Joe Fairless: What are some things that have evolved over your business as you’ve gotten the system down better and better?

Elliot Smith: I think just dealing with the sellers has gotten better. The follow-up has gotten a lot better. We finally hired an assistant last year, and so she’s been a big part of our business. And then just really bringing the partner on, especially with moving back home and being two and a half hours away from Vancouver, my partner is invaluable. And so just the team, I think, that we’ve built over the last two years has really been the most important part. We’re way better as a team than we would be just my wife and I, and I think everybody adds so much value in their own core area that they focus on, and as long as we stay in those areas, then we’re very successful. And so just trying to learn that, and then also learning how to work with your wife, which is not the easiest thing in the world, that took a lot of time and learning the system and how to work together. I think it has really paid dividends as well.

Joe Fairless: What’s some advice you have for someone who’s looking to start working with their husband or wife?

Elliot Smith: I think that you really have to set your expectations who does what, and the biggest problem is I’m very visionary and she’s more like implementer, so if you look at it the wrong way in that you’re not equal and say, “Hey, you need to do this, you need to do this” and you forget everything they’re doing, then your wife tends to or your other partner tends to think, “Well, screw you. You’re not seeing what I’m doing on a daily basis. I’m doing all of the little things that have to get done, and you’re just trying to focus on just big things.”

So really trying to line out, okay, what are our roles, and who makes decisions in each area? So that’s really important. Somebody is the boss of something, but we’re both the boss together of the whole business. So on certain decisions we make decisions together, and then there are certain areas like marketing, the systems, managing our assistant, things like that, Christie is in charge of. And then I’m in charge of anything that has to do with the sellers, with the buying of properties, which properties we’re buying, what’s our plan, who we’re going to partner with, how we’re going to do it.

Then our partner in Vancouver, we don’t ever question him on what he does when he puts the houses back together. He is 100% in charge of that, because he’s way better at it than we are. Christie is good at it, but we tend to do too much, and he’s very good at like, “Here’s what it means, and here’s how we maximize our return.” So mainly just staying in your lane of what you’re doing, instead of trying to boss each other around.

And then also, the biggest thing that we have to get over is if we give feedback to each other, it’s not that we’re attacking each other, but sometimes it can come off like that, like “Oh, I’m attacking you” or “You’re attacking me because I’m not doing enough, or you’re saying I’m not doing enough, and I’m saying you’re not doing enough,” so it’s definitely hard, especially with our personalities where I’m kind of more that bipolar, super-high and super-low personality, and she’s a very linear personality. It was very difficult.

Joe Fairless: Very helpful. Thank you for sharing that, that’s for sure. When you were talking about how your business has evolved, you said the follow-up with the sellers has gotten better. Can you elaborate a little bit more about that?

Elliot Smith: Yeah. When we first started, I was working 70 hours a week, so I only had time for the low-hanging fruit. So if the seller – I knew there were some motivation factors, then I would push them and that would be the lead that I would chase. But the leads that came through that were like warm leads, like “Hey, I might sell in a couple of months, or I might sell in six months,” I would forget about them, because most of the time I’d answer the phone while I was driving and I didn’t have a good system to follow up with them, and then they get lost, and then all of a sudden you’ve just wasted money on the leads.

I answer all my calls through CallRail. All our calls go through there. She’ll go back and listen to our calls and take notes for me, enter everything in Podio, and then actually goes physically on my calendar and sets appointments for me to follow up with people and what I need to talk to them about. So she was basically forcing my hand to follow up with people, because I do forget. So she goes through that, and then I also would not always put the correct information in the CRM, so she’ll go put the correct information in the CRM, let us know if it’s a lead or take it off the list, and then what we talked about, and then “Hey, you said you’d follow up in two weeks”, so then I’ll follow up in two weeks and try to go over that.

Joe Fairless: What a smooth system. I haven’t heard of one as efficient as that.

Elliot Smith: And then she’ll also sometimes — on leads that we haven’t heard from for a while, she’ll just go through and spend a day and just follow up with leads that we talked to like a year ago and just be like “Okay, just touching base with you” and just seeing if we can retrace and refine, find some motivation from people that we talked to a while ago as well. So she’s really good on the phone as well, so if I can’t do it, or if I’m out of the country, she actually answers the phones for us.

Joe Fairless: From a legal standpoint, is it fine to record calls?

Elliot Smith: You need to tell people that you’re recording the phone calls.

Joe Fairless: Okay. Whenever they call, you’re like “Hey, I’m recording this, just FYI, for…” What do you say exactly?

Elliot Smith: Just say, “This is being recorded.” I have an automated thing on there that’s just saying “Hey, this is being recorded.”

Joe Fairless: Do they ever ask you why?

Elliot Smith: No. It’s just the same as like when you call into a top corporation and they’re like “Hey, this is being recorded for quality insurance,” I’ve never been asked why. Most people understand.

Joe Fairless: Got it, cool. Good stuff. Based on your experience, what is your best real estate investing advice ever?

Elliot Smith: I think really getting good at talking to sellers or talking to people, like do you have a heart for people, or are you just chasing a dollar? I think that’s really the key that sets us apart. Our whole team, we care about people first, and then after that, if we make a profit, that’s what runs our business, but we care about putting people first. So we try to do the right thing. If we go into a property and the house is one we probably shouldn’t buy, they probably should list it, after we talk to them, we tell them that. So we never try to force people to sell to us, and so we actually care about people, and I think that’s an important thing to have.

Joe Fairless: Can you tell us a specific example of when you walked into a house and you said, “This should be listed instead of selling to us” and just tell us why and some more details on that?

Elliot Smith: Yeah, and we do it pretty often. So we do the appointment and we walk the house, and basically we just have a conversation with the seller – what are your wants, what are your needs, what are your timelines, what are you thinking, what do you need to walk away with? …things like that. And if the house is in good shape and even if they’re borderline, like we could probably buy the property, or they could sell it on the market, if they can make more money and their timeline is working, they don’t need to sell it right away and the property doesn’t have that much work so it could finance, then we usually are very upfront with them. And we’ve actually bought houses where we were like, “Hey, you can probably get more money selling it as an open market,” and they say, “Well, we still want to sell it to you. What’s your price?” But most of the time, what you run into is people think they can’t sell it on the market, because they don’t have any money to do any repairs, and we’re like, “No, you can actually go this route and it would finance, or you could have some of these repairs fixed at closing.” So we do it pretty often, actually… That’s one example.

My partner also is a realtor, so he can list the property as well, so sometimes we’ll say that as well. But 75% of the time they’ll list it with somebody else.

Joe Fairless: We’re gonna do a lightning round… Are you ready for the Best Ever Lightning Round?

Elliot Smith: Yeah.

Joe Fairless: Cool. First, a quick word from our Best Ever partners.

Break:[00:16:40].18] to [00:17:08].19]

Joe Fairless: Best ever book you’ve read?

Elliot Smith: I would say Pitch Anything by Oren Klaff.

Joe Fairless: Great book. I highly recommend that as well. Best ever deal you’ve done that’s not your first and wasn’t your last?

Elliot Smith: We bought one November of 2016. We bought it for $100,000, we put $40,000 into it, we sold it for $35,000, and we made $121,000.

Joe Fairless: How did you find that one?

Elliot Smith: Direct mail.

Joe Fairless: What’s on your direct mail piece?

Elliot Smith: It’s pretty generic. All our direct mail comes from Open Letter Marketing and that’s — if anyone wants to use what we’re using, that’s where they can get it.

Joe Fairless: Do you have a process for doing a certain number of direct mail pieces to an address?

Elliot Smith: Yeah, we just don’t stop mailing until they call us.

Joe Fairless: Oh, really?

Elliot Smith: Yeah, so we mail them every month until they call us. So that deal actually that I just talked about, we had mailed it for 18 months straight before they actually called us.

Joe Fairless: Every month for 18 months straight?

Elliot Smith: Every month.

Joe Fairless: And what type of addresses do you put on your list?

Elliot Smith: We have a pretty big list. We’re mailing 7,000-9,000 letters a month. So most of our leads are driving for dollar leads. We’re just building our own lists. We’re driving around, building our own list of properties that we’re interested in buying.

Joe Fairless: All 7,000-9,000, are those all that you’ve manually put in there?

Elliot Smith: Yeah, I would say 85% of them were all that we manually went and got ourselves. We went and drove neighborhoods, and wrote down addresses.

Joe Fairless: That’s a high-quality list.

Elliot Smith: Yeah, it is high-quality. That’s the thing — most people, they want to just order a list that everybody else has ordered, and send the same thing that everybody else is sending, and they expect to get different results. So then they’ll mail for 2-3 months and then they stop. We understand that it’s a long game, so we want to send quality letters, which we do, and then when wanna send it to leads that we know we want to buy. Sometimes people are mailing the same place, but sometimes we lose them, and sometimes – the majority of the time, we’re the only ones there.

Joe Fairless: So earlier you said you have a generic direct mail, but then you just said you have quality letters that you send out. So can you elaborate on the quality letters that you send?

Elliot Smith: It’s more just a nicer envelope. We do different letters sequences, with different things in the letter – so different fonts, different wording, and we just go through a process. And again, I don’t want to get in too much in detail just because I’m kind of part of a group that I can’t give too much detail in what it actually says, but for the most part, you’re basically looking to send a letter that says, “Hey, my name is Elliot. I notice you own a house at 123 Main Street. If you’re interested in selling, give me a call.”

A lot of times what you see on letters is people will send out family letters like, “Hey, my wife and I really want to buy your house. I really want to be in this neighborhood as an investor.” We try to make the letter more about them and more to the point than more about us, and that’s the thing I think that really works, because you see a lot of these letters that are all about the investor and the investor’s needs and what the investor is looking for, and it doesn’t really touch on anything where it’s like, “I can solve a problem, I care more about you.” Trying to get that across is not the easiest way, but if I’m getting a letter from somebody who’s like me, if it’s all talking about that person, then I’m like, “Why am I going to call you, knowing that you’re only looking out for yourself?” Does that make sense?

Joe Fairless: Yeah, it makes a lot of sense. I appreciate your sharing that. What’s a mistake you’ve made on a transaction?

Elliot Smith: Oh man, I’ve made a lot of mistakes. Sometimes I think the mistake is really when you get to the appointment and you’re talking price, and sometimes the person will say a price like, “Hey, I think it’s worth 150k” and you’re like, “Holy crap, I was going to pay 175k”, so you get too eager. I’ve done that a couple of times, where I’m like, “Yeah, we can do that” instead of playing it like, “Hey, maybe we should actually try to negotiate.” And so then they’ll be like, “Oh, maybe I sold it too cheap.” So really it’s all psychological with people, right? If anybody goes there and they make an offer and they say a price, and the person immediately accepts it, then you’re going to be like, “Oh, crap, I sold it for too cheap.” But if there’s a little bit of negotiation, you’re going to feel like everybody won.

Joe Fairless: Has that come back to burn you in the past?

Elliot Smith: Yeah, I’ve lost deals that way. What you do is you actually turn the sellers off. Then all of a sudden they’re like, “Now I’ve gotta go back and spend six months to a year rethinking this whole thing” because they’re like, “Maybe I was selling it too cheap, maybe I don’t know–” and then they kind of put their head in the sand and say “Well, I don’t really know what I’m doing and I don’t know how to talk to you, and I don’t know…” So trying to get them back to the table is not always the easiest.

Joe Fairless: It makes a lot of sense. Best ever way you like to give back?

Elliot Smith: I love volunteering, so I volunteer coach on a third-grade basketball team. I like basketball and I like volunteering for junior golf. I’m a big golfer. And my wife and I like just giving back to the community. We gave ten $250 gift cards for Thanksgiving this year to just random people that were nominated on our company page. We adopted a family for Christmas… And just really trying to be a good friend and always being a person that somebody can count on and trying to do things for others.

Joe Fairless: How can the Best Ever listeners get in touch with you?

Elliot Smith: I would say Bigger Pockets or Facebook, you can find me on Facebook. You just write Elliot Smith. And our company page is Summit Development.

Joe Fairless: And your company page – is that your company website, summitdevelopment.com?

Elliot Smith: Summithousebuyers.com is our page, and then just Summit Development is our Facebook page. But I’m on Bigger Pockets and I’m on my normal Facebook page. Most people have been able to find me. I did an interview with another group, and most people have been able to find me that way.

Joe Fairless: Well, thank you for being on the show and talking to us about evolution of your company and some successful tips that we can implement in our business that have helped you. One is the follow-up, and the follow-up approach, having a process… You answer your calls through CallRail, take notes, and then your assistant listens to them afterwards, takes notes and enters them into Podio, puts them on your calendar for follow-up, so it’s an automated process… As well as working with a significant other, setting expectations for who does what, because there will be a division of responsibilities, so it’s necessary to be clear for who does what. And then the direct mail piece for how to be effective. First, have a high-quality list, and holy cow, your list comprises of driving for dollar addresses that you’ve written down. That is the highest quality list that I can think of. And then make the letter more about the recipient and less about the sender.

So thank you for being on the show. I hope you have a Best Ever day and we’ll talk to you soon.

Tamar got her start in real estate with single family homes. Along the way, she realized that reaching her passive income goal was going to be challenging with single family homes. That’s when she bought a gym equipment business and started syndicating properties. Now with three syndications under her belt, Tamar shares her story with us and her best lessons learned along the way.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Trevoris my real estate, business, and life coach. I’ve been working with him for years. Spots are limited, so be sure to apply today!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Tamar Mar. How are you doing, Tamar?

Tamar Mar: I’m so great, Joe! Thanks for having me here today.

Joe Fairless: Well, I love that, great to hear, and my pleasure. A little bit about Tamar – she’s a multifamily investor who controls over six million dollars worth of real estate. She has invested in over 500 units of multifamily property. She is also the host of Investing For Life Podcast. She’s spent 20 years in the startup arena as a COO for prominent companies in fintech, and also in real estate.

This year, Tamar has shifted her focus to the acquisition of underperforming commercial and multifamily property. With that being said, Tamar, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Tamar Mar: Yeah, I sure do. Funny fact about me is I actually purchased my first house when I was 19 years old, because I was hyper-responsible since the time I was about four… And most 19-year-olds don’t buy a house, but I saw an opportunity and I took it up. I’ve had rentals for over 15 years now, and about four years ago I started scaling up my investing business. At that time I had been working in the corporate arena, and just something inside of me said “You know what, I need to have my own business someday”, and I wasn’t really sure what I wanted it to be, but after many conversations with my husband and some other folks, I realized that real estate was something that I was really interested in, and pursuing the opportunity to eventually have an empire that my family could live off of, so to speak… So I rapidly ramped up that.

My husband and I and our three kids started buying houses on auction, site unseen. We did that for about three years, where we would purchase them, renovate them, turn them into rentals, but at some point I realized about a year and a half ago that I wasn’t going to reach my passive income goals quite fast enough with the single-family houses, so at the end of last year I decided to leave my corporate environment job and pursue investing full-time in both the business and real estate space.

I bought a company last year – a high-end specialty fitness equipment retail company almost one year ago, and then I moved into the syndication space. Since then, I have closed on three — well, I’m closing on my third apartment deal within seven months as of January.

Joe Fairless: Wow, a lot to dive into here. Let’s go with the leaving the corporate job and buying a high-end specialty fitness retail company. Did I write that down correctly?

Tamar Mar: You sure did, Joe.

Joe Fairless: What is that, exactly? What does that mean?

Tamar Mar: It’s a company that had been around in the Pacific North-West (I’m in the Seattle area) for about 40 years, and the current owner – he was just tired and wanted to get out; he was in his seventies, and my cousin worked there for a number of years. So the business — we provide high-end fitness equipment for people’s home gyms. So think of really, really nice commercial-like equipment. Then we also provide equipment in the commercial arena such as hospitality, apartments, police officer’s gyms, corporate gyms, boot camps, that sort of stuff as well.

Tamar Mar: [laughs] It’s probably mortal as well at some point… [laughter]

Joe Fairless: Let’s hope it’s not. Let’s hope it’s immortal, right?

Tamar Mar: [laughs] It’s a brick and mortar business. We have one retail location, and then we also go out and use [unintelligible [00:05:57].26] arena as well.

Joe Fairless: Okay. So you purchased a brick and mortar business, and you also are doing syndication simultaneously. What type of syndication are you doing?

Tamar Mar: I am looking at under-performing multifamily assets. My goal originally in March of last year was to do three apartment buildings that were somewhere between the 12-24 unit size within 18 months or so, so by the end of 2018. I wanted to start off a little bit smaller, just to make sure that I had the experience that I needed, and I wasn’t planning on bringing any key principals in or partners to help me out at the time, so that was what my comfort level was.

Now I’ve ramped up — the deal I’m working on right now is a 37-unit and I plan to move up to larger properties after that.

Joe Fairless: Cool. Have you syndicated a deal yet?

Tamar Mar: Yes, I have. I’m on my third one right now.

Joe Fairless: On your third one. What were the first two?

Tamar Mar: The first two were properties that were about five hours away from my house, 4,5-5 hours away. One of them of a 15-unit, and that one was fantastic; it was about $300/door under market on the rents. Not a ton of deferred maintenance, but we really needed to go in and clean up the units, make them a little bit more presentable. We thought that there would only be about five of the 15 that would vacate after we raised the rents, and we indeed were correct in the first month… And then proceeded to have about 10 people total that vacated.

We have just finished up renovating all of those, and we’re getting ready to do a refi after owning it for just about nine months. We bought that one for 825k and now it’s worth probably about 1.25 after renovations.

Joe Fairless: Wow, 825k, it’s worth 1.25 million… And how much did you put into it?

Tamar Mar: Not a ton. I think we’ve put in about 35k into it so far.

Joe Fairless: How much did you put down, do you remember?

Tamar Mar: We put down about 300k. No, 275k-300k… I can’t remember the exact number.

Joe Fairless: Yeah, so 300k divided by 825k… That’s all-in probably about 36%. What type of loan did you get?

Tamar Mar: We got a full recourse loan on that one, and it ws with a community bank, a credit union. When we refinance, we should be able to get a non-recourse debt on that one.

Joe Fairless: It sounds like you’re going to get to close to be able to refinance all the money – or most of the money – you put into it.

Tamar Mar: Yes, which is so exciting, because my original plan was to be able to refi after probably three years… So I’m really pleased that we’ll be able to do that for our investors on such an accelerated timeline.

Joe Fairless: Yeah, that’s great. You’ve got the 15-unit, and you have investors… How many investors do you have on the 15-unit?

Tamar Mar: I think we have about seven.

Joe Fairless: Seven. And for someone starting out wanting to do a syndication, they’re always curious – or at least I was curious – about how other people met their investors… So how did you meet your investors? I’m not looking for names, but just how did you meet them?

Tamar Mar: Some of them were closer friends and family. We had a relative, we had a co-worker of my husband’s, we had a couple of good friends… And then I am very active in the local real estate clubs in my community, so I go to between 4 and 7 of them a month… So I also met some of my investors in those arenas.

Joe Fairless: You go to 4 to 7 meetups a month?

Tamar Mar: Something like that.

Joe Fairless: Wow. You’re based in Mercer Island, right?

Tamar Mar: Yeah.

Joe Fairless: How far is that from downtown Seattle?

Tamar Mar: I am about eight minutes from downtown Seattle.

Joe Fairless: Oh, okay. [unintelligible [00:09:43].25]

Tamar Mar: Yeah, yeah.

Joe Fairless: So I imagine is it all Seattle-centric meetups that you go to?

Tamar Mar: They’re all over the Puget Sound region. Some of them are about 20-30 minutes South of where I live. I try to only — actually, I only go to ones that are within 30 minutes of my house. There’s ones that are all over the Puget Sound, but I have a family and three kids and I don’t wanna spend four hours driving to a meetup, if you know what I’m saying.

Joe Fairless: Yeah, that’s incredible, 4 to 7 meetups a month… That’s on average at least one a week that you go to. So you just block that out in your calendar the month prior, or you just go on a whim and say “I’m available, let me go do this.”

Tamar Mar: Usually it’s blocking it out on my calendar. The seven – that’s a really high number; this month I’m doing a capital raise, so I’m going to as many as possible to make new connections, so definitely on the high end. But I have kids sporting events all the time to go to and I don’t like missing those, so I try to plan around what I have going on with our family and the house.

Joe Fairless: With the 15-unit why did you do a syndication versus a joint venture?

Tamar Mar: I guess in all the time that my husband and I were doing the purchases of houses on auction, we were using our own capital for that; we were using our HELOC. We have a pretty extensive HELOC between two houses that we own. So we hadn’t ever really needed to look for outside capital. When I moved into the multifamily investing space I hadn’t built up a network of friends/family investors that I could go to because we hadn’t really had those conversations with people before. So I didn’t have somebody else that I could go to to say “Hey, do you wanna bring 200k to the table?” Most of the people that I was talking to were more comfortable with the $50,000 range.

Joe Fairless: How much does it cost to put the legal documents together for this syndication on the 15-unit?

Joe Fairless: I just threw up in my mouth a little bit. [laughs] You should have seen my mouth– I almost ate my microphone my mouth was so wide–

Tamar Mar: That’s a really good attorney that I have right there.

Joe Fairless: Yeah, bulletproof, baby. Bulletproof. Okay, $7,000-$8,000. Is that a local attorney?

Tamar Mar: No, he’s actually on the East Coast and he specializes in SEC…

Joe Fairless: Who do you use?

Tamar Mar: Steven [unintelligible [00:12:08].11]

Joe Fairless: Okay. And how did you come across the attorney?

Tamar Mar: I came across him through a podcast; I think I hear him on Michael Blank’s podcast about a year ago.

Joe Fairless: So you got the 15-unit, and how did you structure it with the investors?

Tamar Mar: We did a 75/25 split. It’s just straight profit sharing, no preferred returns on that one.

Joe Fairless: Okay. And now what about the second deal?

Tamar Mar: Yes. The second deal I actually got something under contract right after that first one closed and I ended up getting rid of it. I walked away from the deal because of some information that came out in the due diligence period. Then I quickly got an off-market deal–

Joe Fairless: What came out? What happened?

Tamar Mar: Well, I was reviewing the finances and it was through a wholesaler and it had taken a really long time for them to get us all the due diligence documents. They hadn’t disclosed all of the electric expenses that they had, which were built into the rents. So we found out there was about $25,000-$30,000 worth of electrical expenses that there was no way that we could make it up, and it dropped our returns to probably like 5%-6%. So it just didn’t make sense.

Joe Fairless: And how much if any money did you lose as a result of getting that far?

Tamar Mar: Nothing, because I did all of my financial due diligence before I even move forward with a walkthrough or an inspection… So I was thrilled that I hadn’t lost any money on that deal.

Joe Fairless: Wow, alright. Great. So that didn’t work out, but then…

Tamar Mar: But then I moved into an off-market deal also in Spokane, which is about five hours away from my home here, and… Oh, this one is a treat. It’s a 16-unit, it is a little bit of a shady property, it doesn’t have the best reputation in town, although it’s in a very nice area that’s just right on the edge of a new community, that has built out a couple of giant casinos that are providing about 5,000 new jobs… So I’m not concerned about it just because it’s one of those junky properties in a nice neighborhood sort of a thing. So we are going to move forward in a couple weeks here to essentially vacate a whole entire property systematically, building by building, and do entire renovation inside and outside, and we’ll be able to really accelerate the returns on that property as well.

Joe Fairless: 16-unit… What were the numbers on that one?

Tamar Mar: We put in an offer for 875k, which was quite a bit above asking, and then we got it down to 762k because of all the renovations that needs to be done. The housing authority had been called on the property, it was in that bad of shape.

Joe Fairless: You said 875k was quite a bit above what they were asking?

Tamar Mar: Yeah, they were asking I think 800k originally, but since I had just closed on another property that was similar to that, I knew what the market was like and what it would take to get the deal, so we went in over asking to win the bid.

Joe Fairless: Oh, okay… So really there’s no downside other than potential reputation if you negotiate or retrade and they don’t agree, and they’re like “Hey, you went in with bad intentions; you just went in to get the deal.” So no financial loss or potential loss there…

Tamar Mar: No, and we actually got seller financing on that one through [unintelligible [00:15:25].27] so that’s also fantastic.

Joe Fairless: Was that originally part of the deal, or did that come through the due diligence?

Tamar Mar: That came out just because we didn’t think we were going to be able to get conventional financing with all of the work that needed to be done on the property. For instance, we had original electrical panels – it was a military barracks that were turned into an apartment community…

Joe Fairless: Wow.

Tamar Mar: … so the whole electric needs to be renovated, torn out, and I can’t even list everything that needs to be done. So we just figured we won’t be able to get conventional financing with ease, so we went to the sellers, asked if they’d do it, and they were actually quite open to that idea.

Joe Fairless: And what type of financing did you get with them?

Tamar Mar: I think we put about 22% down, and 6% was our interest rate, and it was for a period of 18 months. So it will take us probably 5-6 months to do the whole renovation process, and then stabilize the property, so we should be able to get conventional financing on that within nine months.

Joe Fairless: Are there residents living at the property?

Tamar Mar: Yes, there are. [laughter]

Joe Fairless: I’m picking up what you’re putting down with that comment… If they’re on a 12-month lease, then how can it only take 5-6 months to do the renovation?

Tamar Mar: That particular property had been prepped for sale about a year and a half prior to the sale. There was a fire that burnt down an entire building, and I think the owners were ready to get out, so they were prepping it by putting everybody on month-to-month leases.

We do have two tenants that are on some housing authority contracts which may be a little bit more difficult, and I think two tenants that are on a 12-month lease. We’re just gonna try to do some cash for keys, see what we can do there, or as we rotate through the different buildings and renovations, we will offer to put them in one of the newly renovated buildings if their lease hasn’t come up yet.

Joe Fairless: How many buildings are there with the 16-unit?

Tamar Mar: There’s just three.

Joe Fairless: Got it. And now the third deal — well, before we move on to the third one that you’re working on right now, what’s the structure on this one (the 16-unit) with the investors?

Tamar Mar: Actually, I guess this one isn’t a true syndication, this is more of a partnership. So I’m the managing partner of this deal; I have two limited partners who are friends of ours, co-workers of my husband’s that are good friends. We did a 75/25 split between limited and general partnership, but my husband and I were able to get in at about 70% of this deal in total.

Joe Fairless: Sweet, okay. And then it’s just profit sharing, no preferred or anything like that?

Tamar Mar: Yeah.

Joe Fairless: Cool. As far as your lessons learned with the 15-unit and the 16-unit, what are some of the things you’ve taken away from those experiences?

Tamar Mar: I think that my risk tolerance has really gone up, and I am willing to see things in a different light. I think my days of doing houses on auctions really prepped me for that, but I’m able to see beyond the mold and the walls, and the shabby conditions, and I’m really looking at how I can create a new community and a clean, safe place where people can create memories together in a nice home. So that’s one thing – look past the ugly.

Another thing is that I am just really getting a crush on this multifamily investing because I’m realizing how quickly you can print money, so to speak, by just improving the operational efficiencies of one of these assets.

Joe Fairless: And that’s the key that you’re doing, and it’s something I wanna talk a little bit more, about the operational efficiencies and how you’re — especially on the 16-unit; the 15-unit you said there wasn’t a lot of deferred maintenance, but the 16-unit clearly it’s gonna be a lot of heavy lifting literally and figuratively. How do you structure your team so that you’re getting that done? I mean, are you the one swinging the hammer?

Tamar Mar: Hah, no. [laughs] Although I’m not afraid of it, but I can’t do that when I have a property that’s five hours away. On this particular one I think it’s all about trusting your team. I have a fabulous real estate broker who has connections all over the state and he has introduced me to some really key people to help me move my business forward… So I’m thrilled to have a property manager out there to [unintelligible [00:19:47].23] to the second deal, and I really trust him.

Then I’m using a contractor that they’re gonna go in and essentially move into one of the buildings while they are renovating it. So I’ll probably go out there once a month to check in on how everything’s going, and I’m gonna be hands-on with the design and all of that, but I will not be swinging any hammers, my friend.

Joe Fairless: And just so I’m understanding if you literally meant this or not – is the contractor literally living in the building while he or she is working on it?2

Tamar Mar: I’m not sure entirely how that’s going to work; I know they’ve done that on other deals, but we haven’t smoothed out all of the details on it.

Joe Fairless: Okay. I was just curious, because if a contractor said “Hey, Joe, don’t worry, I’m gonna crash there…” My question to that contract would be like “Are you currently homeless, and if so, tell me your story, because it speaks to perhaps some life choices.” Maybe not, maybe it’s just bad luck, but most likely some life choices. Okay, that’s the 15-unit and the 16-unit.

Now you’re working on the 37-unit that you’re currently in the process of closing on, yes?

Tamar Mar: Yeah, correct. That opportunity came up right after I got back from vacation and I heard about the deal. The neat thing was we were able to walk the property before putting in an offer, and I cleared my whole schedule so I could do it, because as you know, that doesn’t happen very often. So I walked into it, and the great thing about that particular asset was that unlike most of the apartments that I’ve walked through over the last couple of years that have been in complete disarray, this was not. It was well taken care of, it didn’t have a lot of deferred maintenance, they just had a brand new roof… The units were well taken care of and renovated to some degree as they were vacated, and I felt really good about the way that it was — the repair of it.

Anyway, it’s a stabilized asset, and there isn’t a ton of upside in the rents, if much at all – it’s pretty close to market rates – but where we’re able to make some benefits here for our investors is, again, improving the operational efficiencies by decreasing the expenses, because the expense ratio is very high on this particular property. I think it was about 65%-67%.

Joe Fairless: What should it be?

Tamar Mar: I always calculate about 50% in my forecasts. I should be able to get it less than that.

Joe Fairless: Is that what you’re seeing your 15-unit at around, 50%?

Tamar Mar: No, I’m seeing that about 35%-37%, but this is an older property. It was a hospital that was built in 1926, in a historic downtown area, and it was converted to apartments in the mid-90’s. So it’s so charming… [laughter] It has hallways and elevators that’ll fit a [unintelligible [00:22:36].08] [laughter] So we do have a little bit higher expenses because we have an elevator, and it is a bit of an older property as well.

Joe Fairless: And just for the Best Ever listeners who are doing some math at home and they heard me say “invested in over 500 apartments” and then they calculated these three – so you’ve also invested passively in some deals first, and now you’re syndicating, yes?

Tamar Mar: Yeah, that’s true. So we’ve invested previously in the past in some retirement communities that we’ve gotten out of, and then we’ve also invested in passive opportunities, including one of your deals.

Joe Fairless: What is your best real estate investing advice ever?

Tamar Mar: My best real estate investing advice ever is to be decisive about what you want to accomplish, and really have confidence in yourself and your plan. I think if you have believability — it lends credibility and believability to people if you have absolute confidence in what you’re doing.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Tamar Mar: Heck yeah!

Joe Fairless: Alright, then heck yeah let’s do it! First though, a quick word from our Best Ever partners.

Break:[00:23:42].06] to [00:24:13].07]

Joe Fairless: Alright, best ever book you’ve read?

Tamar Mar: The best ever book I’ve read is Laws of Success by Napoleon Hill.

Joe Fairless: Best ever deal you’ve done?

Tamar Mar: I really like that first multifamily deal in Spokane, the 15-unit.

Joe Fairless: How come?

Tamar Mar: Because it showed me the power of investing in the multifamily space, and just having diligence and moving forward and crushing your goals.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Tamar Mar: I don’t know… I feel like sometimes all these things blur together and I can’t think of a great answer for that.

Joe Fairless: If you could do something different on — let’s go with the 16-unit… So far, that you didn’t do – what’s one little tactical thing that if you could do different, you would do different?

Tamar Mar: I think I probably would have gone out to the property to see it first. I hadn’t seen it before I put in an offer on it. I thought there might be a potential to build some extra facilities on it, for instance some self-storage, because it’s quite a large lot – three parcels – but then when I go there I realized “Oh, there’ s giant self-storage facility right across the street”, so it kind of crashed that dream, but I hadn’t driven by it yet.

Joe Fairless: Best ever way you like to give back?

Tamar Mar: I love listening. I like listening to other’s needs to see where I can add value.

Joe Fairless: And how can the Best Ever listeners get in touch with you?

Tamar Mar: You bet. They can visit InvestingForLifePodcast.com to be connected to my podcast, or my website, which is MarotaGroup.com.

Joe Fairless: Okay, and MarotaGroup is in the show notes, so Best Ever listeners, you can just click that and check it out. Well, Tamar, thank you for being on the show and talking about these case studies. You walked us through the details of these case studies – the 15-unit property, the numbers behind the property, the business plan, and congratulations on this upcoming refinance; you’re getting out most likely all or most of the money that you all put into it, and you’re putting more long-term conservative debt on it.

Then the 16-unit – I recommend journaling on this one… It sounds like you’re gonna have some more good stories with the 16-unit. That’s gonna be a lot of fun, to listen to stories about that as that continues to evolve, as well as good luck with your 37-unit.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

If you regularly listen to the show you may eventually have a rehab project if you haven’t already. When you do, there are many expenses you need to look out for, such as capital expenditures for remodel, the cost of money to purchase, and most definitely the cost to hire someone to sell it. How about finding someone that will sell your product above asking price? Our guest today is your man! Learn how to vet each candidate.

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff. With us today, Aaron Hendon. How are you doing, Aaron?

Aaron Hendon: Joe, I’m doing great, thanks! How are you doing?

Joe Fairless: I am doing well, and nice to have you on the show. A little bit about Aaron – he is a five-star realtor with Keller Williams Greater Seattle. He provides boomers with aging parents a stress-free way to handle senior transitions and estate resolutions. He’s the host of the Seattle Real Estate Podcast, and he is, of course, based in Seattle, Washington. With that being said, Aaron, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Aaron Hendon: Well, I’d say I’m a residential realtor now. I’ve been a real estate investor for about 15 years; I got into the residential, agent side of it about five years ago. Also, an author and an educator. I really do consider my job to be consulting with people when they’re making the biggest, most expensive transaction of their life. I work with investors and individuals looking to buy their homes, or anyone looking to buy residential real estate.

Joe Fairless: Okay, let’s just clear that up in my mind a little bit. So anyone who’s buying residential real estate you work with, but I believe — do you have a focus with baby boomers, or is that not the case?

Aaron Hendon: I do. One of the niches that I focus on are helping boomers with aging parents. The avatar there would be “Leave. I’m a boomer, my parents are in their nineties and I don’t know anything about anything about what I was gonna have to deal with when it came time for them to move out of their homes.” They got themselves a reverse mortgage on their own, I didn’t know anything about that, I had to go look into that… Estate resolution… It’s just such a stressful time for people; it’s such a hard space emotionally… Your house itself is emotional, much less your parents. So you’re dealing with all of that.

Anything I could do to facilitate that transition I thought would be a very useful, valuable niche. I come from the mind of the — I don’t know if you ever read the book The Go-Giver – it’s sort of “How can I help? What can I do to provide value?” I thought there was a real niche that really could use help, so that’s a focus of ours here for sure in the last couple years.

Joe Fairless: It makes sense, and I do enjoy the Go-Giver, and the author of that, Bob Burg has been on the podcast a couple times, so Best Ever listeners, you can listen to his interview on this show, as well if you just google “Bob Burg Joe Fairless”.

Let’s talk about your investing approach. I believe you said you were a residential real estate investor for 15 years – did I hear that correctly?

Aaron Hendon: Yes.

Joe Fairless: What were you investing in?

Aaron Hendon: Single-family homes, the remodel and we’d rent out, and look at value and flip at some point, but buy and hold mostly.

Joe Fairless: Okay, and was that a past tense or present tense as far as you being an investor?

Aaron Hendon: Past tense.

Joe Fairless: How come?

Aaron Hendon: Well, because when the downturn came we lost our money. We lost our capital in the downturn, and have been slowly building back up. That’s sort of how I got into the realtor side of things. I thought, “Oh, well there’s a way for me to stay involved in something I enjoy, and carry none of the risk” – it’s a very low-risk model from the point of view of the realtor, and yet I could facilitate that with people that were looking to buy and hold, or flip, or do anything like that.

At this point, financially, for my family, we’re probably in the next 12 months looking at getting back in because now as a realtor, of course, I get the advantage of the commission.

Joe Fairless: Oh, yeah!

Aaron Hendon: It’s ridiculous for me not to be back. It took some time… I’m sure you have listeners for whom the downturn hit them, and it did for me, for sure.

Joe Fairless: Oh, absolutely… And I’m curious now that you’re going to get back into it, what is your approach going to be now versus then?

Aaron Hendon: Well, for sure don’t get carried away. It was very easy — looking back on it now, it’s just been sort of insane… Ninja loans, and all the questions I had about it at the time were like, “Wow, are they really gonna lend me this much money?” – that kind of stuff. So to not get carried away and not do things that don’t actually make sense. You don’t have to take the money just because they’re giving it. If it doesn’t actually make sense, there’s probably something on the other side of that. So we wanna do it more slowly, do it more cautiously, not get carried away, make sure that a downturn doesn’t take out everything.

Joe Fairless: What will be the type of financing or property you purchase on this next go round?

Aaron Hendon: I would stick with single-family residences, because that’s really sort of what I know and it’s my sweet spot. As much as I enjoy learning new things, I’d like to start back up with what I already know. I would prefer to start with — if I could find the flips, it would be the flips, but in the Seattle market right now there’s just so low inventory, and everybody who’s already in the business, all the investors, they’ve already got that covered. So I would most likely be looking for buy and holds. The Southern [unintelligible [00:07:24].03] Tacoma area… There’s a couple of great colleges there, so vacancy rates would be naturally lower because of the turnover, because of demand, and there’s the joint air force base Lewis-McChord, which are great tenants, and home values are certainly low enough that you could buy and have the rent pay the mortgage and then some, and that’s really where we’re gonna be looking.

Joe Fairless: And with the fix and flip, do you have your own team that you used in the past that you would just activate again, or are you starting from scratch with the team?

Aaron Hendon: I would be starting from scratch with that team.

Joe Fairless: What’s your role in the fix and flip process? How hands-on are you?

Aaron Hendon: I wasn’t, at all. Like I said, it’s been years since I’ve done it, so there’s no team now. When I did it, I was not hands-on at all.

Joe Fairless: Okay.

Aaron Hendon: I’m not handy with a hammer.

Joe Fairless: That makes two of us. So let’s talk about you being the host of the Seattle Real Estate Podcast – how long has that been running and what business result have you seen from being the host?

Aaron Hendon: It’s been about a year, and mostly it’s just a top-of-mind kind of phenomenon for people. I frankly don’t get a lot of subscribers, it’s not something I particularly promote as a podcast… I do educational videos at least two or three times a month, about topics that people ask me about. Sometimes I’ll do interviews, I’ll do interviews of people like a contractor or a lender or something like that, that are applicable for people buying residential real estate… And answer those kinds of questions, things about “What are the most profitable remodels I should do before I sell? Or the least profitable remodels. What’s it like to live in this part of town?” Market updates, “What’s the market doing?”, things like that, so that people, when they think of residential real estate, they might think of me as a resource.

All that goes up on YouTube, all those go out to my e-mail list of about 2,000, twice a month, so that people… Again, total go-giver – value, value, value. When they look in my direction, they think “Oh, well there’s a resource… There’s somebody who could give me some advice.”

In terms of ROI or business results, things like that, mostly it comes in the form of people call me — I just got a call from someone that I haven’t spoken to face-to-face, voice-to-voice, in 12 months, 15 months, something like that. And they just called and they said, “Listen, I’ve been getting your stuff, and I have a question. We’re right now ready to sell…”, and it’s that kind of constant drip of value on them that leads, with no ask, no sale (I’m not asking for anything) that leads them when it’s time to find someone to help, they come to me.

Joe Fairless: I love that. One thing I’ve noticed with my podcast initially is that I didn’t get any comments or feedback or outreach from strangers initially… But what it did is whenever I shared it, it influenced my current circle of friends and family, and it positioned me as a thought leader within my current circle of friends. The people who had been either needing questions answered in the real estate investing space, or thinking about it, who I already knew, this then positioned me as a thought leader, and it sounds like it’s been similar results for you.

Aaron Hendon: Yeah, Joe, a hundred percent. I don’t know how you feel saying the word “Thought leader” about yourself… It always makes me sort of uncomfortable – I always consider myself to be “Okay, I’m just some guy”, but at the same time I am putting myself out there and I do think that I have value to add, and I think that’s exactly right, I think it positions me as someone who people could turn to. For any of the listeners, everyone’s got something to add, everyone’s got value, everyone’s got a unique perspective, and I think it’s just a question of bracketing and putting aside our own internal thoughts of “Oh, I’m not really that smart” or “I really can’t do that.” Just put yourself out there.

Joe Fairless: Have you noticed any tangible business results since you’ve been doing it for a year? Any deals that have closed or any transactions, or is it still brewing and brewing, and long-term you’ll see stuff?

Aaron Hendon: Something I do with the videos that turn into the podcast – those videos go twice a month to my list, and then I always call through my list of anyone who’s opened the videos… You know, you get a click report, you can find out who opened the video and who clicked on it, and as soon as I call through that list – prospecting – part of my phoning is calling through that list, and I call them and I’ve had people on the other side say “Oh great, I’ve gotten your video. Thank you so much for calling. Listen, my brother-in-law is ready to sell – do you wanna give him a call?” That kind of thing.
So I’ve probably done two, maybe three deals last year, something like that, from the e-mails. It’s the prospecting, though… You can’t really tell that they’re calling in from the videos, but you can tell if you call them… So I don’t know how many deals I got just from it, other than the ones that I called out to. But it’s two or three for sure, in the last year, which is not bad; it’s the first year I’ve done it

Joe Fairless: Yeah, that’s great, especially when you can start looking at the platform paying for itself and then some. You mentioned something earlier that piqued my curiosity… You said the most profitable remodel and the least profitable remodel before you sell – one, can you tell us what those are? And then two, if they’re market-specific to Seattle.

Aaron Hendon: I don’t think they’re market-specific, although I certainly don’t want anyone to come back to me later and go “Oh no, that was just Seattle!”, so I don’t know…

In terms of most profitable – and again, I’m speaking to individuals out to sell their home, not necessarily investors with money to put in… So I haven’t done it from that perspective, but from the residential homeowner, out to sell their home, the first thing I think they need to understand is that no remodel is gonna return more money than they put in. That remodel, at best, you’re looking at 80-90 cents on the dollar from an individual fixing their house. It’s different if you’ve bought a foreclosed home and you’re gonna go put money into it; that’s a different scenario and I haven’t done that work. But for the private homeowner, looking to improve their house, if they’re already clear that part of the value needs to be the amount that they enjoy it, that they don’t do it just before they sell, because they’re not gonna get that money back, the most profitable seemed to be putting on a nice deck, or fixing the deck that they have, making outdoor space. It’s relatively inexpensive, it looks great, and it adds in usable square-footage in some way that doesn’t necessarily get reported, but it’s fantastic, and it creates a great eye appeal, and that’s such a big deal when you’re selling your home. So that’s one thing.

Same thing with kitchens. Kitchens – you can spend $40,000 remodeling your kitchen and you’re not gonna get that back, but if you did it intelligently, did it economically, did it in a nice, well-done way, you can get 90 cents on the dollar back when you sell that house, and if the kitchen becomes more functional for you for the year or two that you live in it before you sell it – fantastic. That’s a great use of money.

The third one is usually going green – tankless water heaters, possibly solar, maybe radiant floors if you’re doing an add-on… It’ll give you, again, the best shot at getting 90 cents on the dollar, and only more and more popular… Green solutions are just becoming more and more valuable as we move forward with our economy. So I think those are the three places that residents can look.

Joe Fairless: And what about the least profitable?

Aaron Hendon: I think the least profitable ones are — first of all, primarily, anything you do, think in principle about this… No one is out to buy your home; people are out to buy THEIR home. They don’t wanna buy YOUR home, they wanna buy a house that they can turn into their home. So things that you do to the house that YOU love, like paint – if you’re gonna paint, you’d better be painting white, you’d better be painting neutral… Do not paint that room pink because you love pink, it’s detrimental. Not only do you lose the money and time it took you to paint it, but people are gonna pay you less. Same thing with carpeting… Unless the floors are just horrible, you’re way better off getting a carpet credit than you are carpeting, because no one’s gonna like your taste; nothing personal, but really… Don’t. Just don’t put in new carpeting. Flooring… Any kind of vinyl flooring – you just cannot rely on the fact that the buyer wants that, and you’d be better off offering that much money in the credit than you would be doing it yourself, because you’re liable to turn someone off.

So things that are cosmetic that are particular to you are the worst possible investments you have to flip the house.

Joe Fairless: Yeah, that’s a great lesson for investors… Definitely investors as far as no one’s buying your home, they’re buying their home, so make sure we do the renovations that align with the mantra.

Aaron Hendon: Yeah, very good. Great way to say that.

Joe Fairless: What is your best advice ever for real estate investors?

Aaron Hendon: This is very self-serving, so you’ll have to forgive me, Joe, but get a good realtor partner. Don’t go cheap when it comes time to find the professional that’s gonna sell that home. A good realtor, and if you interview a realtor well, he should be able to get you more money at sale than doing it yourself or doing it with a discount broker, and you can absolutely find realtors who’s list-price-to-sell-price ratio is high enough to cover their commission, and finding someone like that is like finding a great contractor. It’s like finding a great drywall.

Joe Fairless: What’s the list-price-to-sell-price ratio?

Aaron Hendon: It’s how much over or close to list price do you get when you sell a home.

Joe Fairless: You can ask that of the agent whenever you’re interviewing him or her?

Aaron Hendon: You sure can.

Joe Fairless: I guess you should…?

Aaron Hendon: Well look, isn’t the point to get the most money in the least amount of time with the least hassle? If that’s the point, then that’s the kind of questions you wanna ask your realtor that really nobody asks, Joe. This is literally how I got started in my educational program of creating videos and creating books. I’m in the middle of my second book now, called Real Estate Blindspots, because it’s so shocking to me that people actually do want the most money in the least time with the least hassle, but what they do when they interview realtors is pretend “Oh, they’re all the same.” It’s whacky!

Joe Fairless: Okay, you can ask that question, “What is your list-price-to-sale-price ratio?”, but how do you get verification that what they’re saying is correct?

Aaron Hendon: If you’re questioning their honesty, we’ve got a problem right away, with using that person. But you could easily ask them “Show me the listings you sold in the last 12 months.” When I go for a listing appointment, I print out the last 12 months worth of listings and I show them the list-price-to-sale-price ratio. Now, no one does that; I know no one else is doing that, because everyone else is organized around the way the market thinks, and the way the market thinks is “All realtors do the same, so therefore the first one that comes through my door is the best one.” That is really how the market thinks, and I’m out to break that up and let people know, “Look, there’s other people that you might have interviewed that they show you this?” You could just ask them to print it up off the MLS.

Joe Fairless: Instead of asking what’s your list-price-to-sale-price ratio you can just ask “Can I see the listings you sold in the last 12 months, a print-out of that?” and then you’re not questioning their truthfulness, you’re just asking them to look at that… And then on those print-outs will it show the original list price and the sale price?

Aaron Hendon: It will show the list price, the sale price and the days on market. It should all be right there for you. And it will blow their mind. I promise, if you’re an investor, if your listeners do that, there will be people that get chased away. There’ll be people that get insulted, there’ll be people that find you arrogant… And what a great way to vet who you work with, because how dare anyone be insulted? They’re about to take 2%, 3% of your commission, and they’re gonna get insulted?

Joe Fairless: I love that. That’s phenomenal. I’m really glad that you mentioned that. What is a good ratio?

Aaron Hendon: That’s a really great question, Joe, and that is something that you either would wanna research yourself and find out what the market is like in Seattle… It’s a super hot market, it’s insane… Multiple multiples over asking price; two days on market, six, seven, eight, ten offers – it’s crazy. It’s not like that everywhere. Our team does 105% of asking price on average, where the local market altogether is 100% of asking price… Because if you’re taking all of it, it’s 100%, and we consistently get 105%.

Good, it’s not like that in Tallahassee, but you should find out what it is like in Tallahassee, find out what the overall market in Tallahassee is like, so that when you compare realtors, you’re comparing them against your market average; not some national average, but YOU, where YOU’re selling. And you can ask them, you can find a realtor that finds that out…

I’m trying to think how investors would find that out… I’m a little bit off about how to do that…

Joe Fairless: We could simply ask three, four or five people, real estate agents, that question, and then we’ll at least be able to compare those five against each other.

Aaron Hendon: Completely! And then you can see, because if you get someone who’s obviously heads and shoulders above the rest, you can then start asking, “Okay, how do you do that?” And then, Joe… I think it’s really great, it’s just a really good point, because at that point, after you’ve gotten their actual performance, then you could ask the questions – “Okay, do I like hanging out with this person? Does this person fill me with confidence? Do they make sense? Do they have integrity? Is this someone I wanna do business with?”

I think those are also still critical questions, I just don’t think those are the only questions, and those are pretty much the only questions that anybody ever uses, not the performance one.

Joe Fairless: I love that, it’s very helpful for anyone listening who will use a real estate agent, which is most of us. Are you ready for the Best Ever Lightning Round?

Joe Fairless: Now let’s roll right into it. What’s the best ever book you’ve read?

Aaron Hendon: I’m gonna tell you the last book, because the recency bias is always right there for me… The last book I read is called The Undoing Project by Michael Lewis. That’s the guy that wrote Moneyball and The Big Short. I find him fascinating, he’s a great writer. The Undoing Project is about Daniel Kahneman and Amos Tversky, who are Nobel prize-winning psychologists who created really the field of behavioral economics. Just a fascinating look on how human beings are so predictably irrational in their buying.

Joe Fairless: Oh, sign me up!

Aaron Hendon: It’s the basis of my Real Estate Blindspots book, about the way we’re idiots about real estate.

Aaron Hendon: Okay, the best ever deal… I have very good friends that I got to write an offer for… I’ve actually done this twice now with friends, but one where we went and saw the house – it was the second house they saw – we walked in, they loved it, there was already an inspection done. I called the realtor and I said “Hey, my clients really love this place. Do you have an offer?” They said, “Yeah, well we’ve just sent our counter-offer back to them but it’s not signed yet.” I said, “Okay, well if I wrote you an offer at this price, could it bump the one you have?” They said, “Yes, it could…”

So we sat down at a coffee house, we wrote up that offer, got it to them, they rescinded their counter-offer and accepted our offer. So while that’s clearly some other realtor’s least-favorite deal, that was my favorite. I loved being able to do that.

Joe Fairless: What’s the best ever way you like to give back?

Aaron Hendon: Honestly, I do work with a company called Landmark Worldwide. It’s a company that’s committed to transformational leadership and transformational educational in the world, and I’ve been participating and leading programs with them for about 20 years. It’s a volunteer process for me, but man, to watch people step beyond who they know themselves to be and into a world where they become leaders in their own life… There’s just nothing like that.

Joe Fairless: What’s the biggest mistake you’ve made on a particular deal?

Aaron Hendon: That was what was there for me when you said “What’s your favorite deal?” – what’s my least favorite deals… [laughter] There was one last year where I had this great client, I totally loved them – and they did love me, up until this – and the deal was sort of closed way too quickly. It was out of protocol; the whole thing was out of protocol. They were using Bank of America, which if I could make sure that none of your investors ever use the big banks, it would make me thrilled and happy…

So they were using a big bank, and I knew it, it was a problem all the way through the deal. The deal finally got approved and was ready to close on a Friday, and my client e-mailed me and said, “Can I please, please, please, please get in there this weekend? Can we close today?” and I said “Yes”, and I should have said, “Well, we really do need to do a walkthrough, which could postpone the close until Monday… But we should do a walkthrough. How do you wanna do it?” – and I didn’t say that, I just said yes.

We went ahead and closed, and then we did the walkthrough and the seller had left just a ton of stuff all over the house, and while I paid for the cleaner, I got it all cleaned up, my client was just heartbroken. They had gotten a house that was just so poorly maintained, and it all could have been avoided had I done the walkthrough, had I done what I know to do. They won’t use me again, it was a tough deal to put together, but I didn’t do what I know to do at the end, and it was just a shame. It was really disappointing.

Joe Fairless: Lessons learned along the way, that’s for sure.

Aaron Hendon: Absolutely.

Joe Fairless: Where can the Best Ever listeners get in touch with you, Aaron?

Aaron Hendon: Probably the best thing to do — so I wrote a book about interviewing realtors, called “Don’t get fooled again.” It’s seven questions you must ask to avoid hiring the wrong real estate agent again. If they go to dontgetfooledagainbook.com, they will not only be able to download that book for free, they’ll also get on my mailing list, which will then get them all my information, and they’ll also be on the list to get a free copy of The Real Estate Blindspots when it comes out later this year, which is a much more thorough investigation of the ways in which we are irrational, foolish with buying and selling real estate. And I’d love their feedback on that too; that would give me a really big favor, if when they got a copy of that book, they were available to give me feedback. That’s a promo for your investors.

Joe Fairless: Aaron, the number one question you gave us, if that’s any indication of what’s in that book… Everyone definitely should get the book. I love the question, and we should all ask potential real estate agents who work with us “What is your list-price-to-sale-price ratio?” or maybe instead of that, just ask to see the listings over the last 12 months, and then you’ll see the list-price-to-sale-price, and days on market, then compare them to others or compare them to a standard that we know the market to be at.

Thanks so much for being on the show… Lots of other great lessons, but that’s the one clearly head and shoulders above for me, that I took away from this interview. I hope you have a best ever day, my friend, and we’ll talk to you soon.

He manages/owns 87 units ranging from single units to multi family to single-family homes. That’s a lot… We know, yet we are still perplexed by how he does it all himself. Hear how he manages his section 8 rentals and his screening process, it’s worth taking notes.

– Managing Partner at Philia Holding Company, LLC
– Started in RE in 1990 with 3 partners and a 4-plex, while serving as a full time Youth Pastor
– Over the 26 years he has bought out each partner
– Has accumulated several SFR, duplexes, a 10 & 24 unit apartment, & a 42-unit mixed-use building
– Current project is a major farmhouse rehab that includes a short plat.
– Based in Seattle, Washington
– Say hi to him at http://www.philiahc.com
– Best Ever Book: Millionaire Real Estate Investor by Gary Keller

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House hacking seems to be the way to go and especially get started in real estate. Our guest did so with Microsoft employees, high tenants who rented rooms while our guest lived in the master. More to come in this episode, tune in!

– Real estate investor and musician
– In 2002 was working full-time at Microsoft and acquired a rent-by-the-room rental home
– In 2012, partnered with his brother to build a portfolio of multifamily rentals in Seattle
– Received a GRAMMY Nomination in 2014 for playing drums in Macklemore & Ryan Lewis album The Heist
– Based in Seattle, Washington
– Say hi to him at http://www.jeremyjonesmusic.com
– Best Ever Book: Autobiography of a Yogi